[DesertCat]

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Here is what he told us:

Your assignment is to write an alaysis of the common stock of Illinois Tool Works (ITW). A few guidelines should help.

1. Be sure to reach an actionable conclusion - i.e., buy sell or hold. You must look at the long run using an investment perspective and generate a value for ITW based on your own forecast of future performance. You must also explain the basis for your forecast. You should also look at the short run (trading perspective) and market comparables. Remember that your conclusion is a function of current market price as well as your valuation.

Thats basically all he told us. Again, any help is greatly appreciated.

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Well, Ben Graham would tell you to look at the average of the last 3-5 years of sales and earnings to get a good ida of the next 3-5 years. Adjust your forecast for extraordinary changes in business. See how cash flow matches up to reported earnings.

Do you know how to do a discounted cash flow analysis? That's the basic way to determine intrinsic value from your forecast. Do you understand what enterprise value is? You'll want to incorporate that into your valuation. Give yourself a big margin of safety because predicting the future is a very inexact science.

Lastly, your actionable conclusion should be fairly easy. If it's clearly fully priced or over priced, sell. If it's clearly cheap, buy. If nothing is clear, hold!

Ben Graham would also say that market comparables and the short run (trading perspective) are meaningless and unpredictable. I find it surprising that a professor would even broach these topics in a security analysis class.

The reason I say comparables are meaningless, is if all the comparables are overvalued, they'll tend to make ITW look more attractive than it really is. The internet bubble was full of stocks that were much cheaper than their leading comparables. I know because I bought some before I really understood that valuation isn't relative. Ouch.

An exception would be private party value. That's where you look at what savvy buyers (not the stock market) pay for similar companies. But these savvy buyers are likely doing the same DCF valuation you would do to establish value.

Tell your professor I'm failing him...