LIFE Portfolio

Endowment Report
Spring 2018

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 Table of Contents

Executive Summary .….…………………………………………….…………………………. p.3

Philosophy and Approach ……………………………………………..………………….… p. 3-4

Social Screen ………………………………………………………………………….………. p. 4

Investment Strategy ……………………………………….……….….……………………… p. 5

Portfolio Performance and Distribution ………….………………………………………… p. 6-7

Investment Analysis

ETGLX ………………………………………………………………………….……. p. 8

Apple …………………….……………………………………………………....... p. 9-11

Ford …….………………………………………………………………………… p. 12-14

MasterCard .………………………………………………………………..…….. p. 15-16

United Rentals ……………………………………………………………..…….. p. 17-18

Bell Canada Enterprise ………………………………………………………..…. p. 19-21

CISCO ………………………………………………………………………...…. p. 23-25

Future Recommendations ……………………………………….………………………..…. p. 26

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 Executive Summary
The Loras Investment Fund for the Endowment (LIFE) portfolio is committed to investing in
socially responsible companies, which forecast strong performance and growth for the future. In
the past three months, the fund has continued to outperform the S&P 500. A Catholic Social
Teaching screening process has been implemented to ensure the companies held in the portfolio
and future investments uphold the college’s ethical values. During the past three months, we
researched and added a new investment into our portfolio, Bell Canada Enterprise. In addition,
we evaluated CISCO and look to determine whether or not this investment option will be added,
according to recommendations or opinions during the presentation. We reevaluated four of our
current holdings in the portfolio, which included Apple, Ford, Mastercard, and United Rentals.
In order to purchase 250 shares of Bell Canada Enterprise, we did not have to allocate funds
from CATH, a Catholic Mutual Fund, but had the cash on hand. The 250 shares estimated
around $10,000 to purchase BCE. This report will outline the decision process for each of the
companies that were re-evaluated and the newly added company as well. A series of
recommendations will be given for the reevaluated investments we currently hold. A continuous
analysis of the current holdings is important in order to ensure the investments still positively
impact our portfolio, both ethically and economically. The purpose of this analysis by the current
LIFE Portfolio class was to demonstrate the effectiveness of strategic value investing.

Philosophy and Approach

The philosophy and approach of the Loras Investment Fund for the Endowment (LIFE) portfolio
was established in 1998 through the generosity of donors to allow students the opportunity to
learn investment techniques. This unique opportunity allows students to gain first-hand investing
experience by managing a portion of the Loras College Endowment funds portioned in the
portfolio. The earnings from the Loras College endowment are used towards supporting
organizations on campus for competitions and other funding necessities. This amount is 3.5% of
the three-year, moving average of the value of the portfolio which is determined as of June 30.
The fund’s strategy is to continue to safely grow the endowment fund in the long-term, while
also investing in socially responsible companies who exemplify Catholic Social Teaching values.
The LIFE portfolio class invests in companies that are sustainable and committed to the
standards outlined in the Catholic Social Teaching (CST) values. An investment must pass the
social screen before any further valuations are conducted. Once an investment passes the social
screen, we proceed with the financial analysis of the company. We analyze the companies based
on the methods presented in Strategic Value Investing by Stephan Horan, Robert Johnson, and
Thomas Robinson, CFAs. Our objectives in analyzing companies is to determine if the company
is trading below its intrinsic value, or in other words, at a discount. In order to reduce risk, we
proposed a 15% margin of safety, or confidence level, which is taken into consideration for each
specific investment given the three month time period of the class.

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We believe the decision-making process to invest in socially responsible companies does not
only lead to more profitable companies, but also shelters a more competitive edge against
competition. As a class, we gather concrete evidence and data on our companies to ensure we are
not speculating the future performance, but rather, can justify our evaluations. The companies in
our portfolio may be Fortune 500s, but there is also a mix of companies not mentioned regularly
in the media that generate excellent returns. The LIFE portfolio class continues to make
responsible decisions for the Loras College endowment, while showcasing the skills students
develop and utilize when strategically valuing companies over the three month time period.

Social Screen
The majority of the standards set in the LIFE portfolio social screen are based on the CST
principles, however more values are included in the screening process. The main aspects of the
screening includes topics of: government, international affairs, societal concerns, development in
community, and overall sustainability. It is through focusing on these issues that we are also
working to strengthen the overriding financial standing of the portfolio.
The following values are key in the decision-making process when performing the social screen
of the potential investments:
 Protection of human rights including but not limited to the fact that human beings are
communal, have fundamental dignity and worth, have natural rights, must work to
achieve the common good, and that human beings should be treated with justice.
 Payment of a fair wage to employees based on relevant societal and industry factors
 Reasonably safe working conditions for the employee in order to limit the physical,
psychological, and moral harm caused.
 Fair labor practices by supplier or suppliers, especially when conducting international
business.
 Corporation continuously attempts to decrease any negative effects onto the
environment
 Positive community and government relations; giving back
 Strong audit history
 Positive relations involving legal issues, both in US and outside nations

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 Investment Strategy
The Loras College LIFE portfolio class utilizes the practice of value investing. We believe that
we can make a long run, positive return on the portfolio by recognizing and finding undervalued
stocks and then exploiting the occasional inefficiencies in the market. It is seen with the work by
Stephen Horan, Robert Johnson, and Thomas Robinson with Strategic Value Investing, the art of
value investing is outlined. It is with using this text that we go through the valuation process of
current holding in addition to narrowing down protentional, future holdings. To ensure continued
profitability with our investments, we recommend continuing with re-evaluating our current
companies. We focus on a top-down analysis of the current and potential holdings regarding our
investment strategy.
Portfolio investment requirements include:
 Evaluation of the current state of the economy and its future trajectory
 Evaluation of the industry, and its potential, intrinsic value
 Evaluation of potential to invest into
 Once the company is selected, a social screen and use of Porter’s Five Forces are used to
evaluate possible risk factors
 Evaluation of the company that it is priced below their calculated intrinsic value given the
current state of the economy, industry, and fundamental characteristics of the company
(including earnings, cash flows, assets, liabilities, etc.)
The discount models used to evaluate the intrinsic value of the stock in comparison to the current
price include:
 Dividend Discount Model
 Free Cash Flow Model
 Residual Income Model
It is then required for the company to show potential in more than one aspect of the investment
strategy. It is important to do a complete analysis in a timely manner because finding these
potentially undervalued companies is rare and the opportunity to receive the perceived value is
limited. It is also necessary that the complete analysis includes an evaluation of the economy,
industry, qualitative aspects, and the quantitative calculations. We use this method because we
believe it is the best way to maximize the potential for a profitable investment in our portfolio.

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 Portfolio Performance and Distribution
The Loras College Endowment Portfolio is mostly invested in large cap investments at 53.26%.
and around 37.34% of the portfolio is allocated in mid/small cap investments. The addition of
BCE added 3.81% of International stock to the portfolio as shown in Figure 1. Figure 2 provides
insight into our portfolio in comparison to the S&P 500. The graph highlights the portfolio out-
performing the S&P with a 0.27% YTD increase in the new-year compared to the S&P 500’s
return of -0.25%. During this time period, our class has been monitoring the overall market, as
well as ensuring our companies keep pace with the market, as demonstrated in Figure 3. Even
when the overall market dropped early in the new-year, our portfolio continually generated
higher returns in comparison to the S&P 500 as it did in previous months.

Figure 1.

Figure 2.

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Figure 3.

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 Investment Analysis

Eventide Gilead N (ETGLX)

Eventide Gilead is one of the top mid-cap growth funds for overall returns, with a 1.90% YTD
return in the new year. This fund has been established since July of 2008 and in 5 years it
generated over a 15% net return and has continued this though 2017 as seen in Figure 4. Overall
the fund manages $1.5 billion in assets with a holdings turnover of only 26% according to Yahoo
Finance. The fund seeks to be highly diversified but also attempts to pay close attention to both
market and internal correlation, while also screening companies on religious, environmental,
social, and factors concerning governance. The fund has 65 holdings overall. These are in small
percentages with the largest only being slightly above 4%. Figure below lays out the history of
the fund; the figure compares the fund to the S&P, shows the trend in the turnover ratio, and also
the fund’s rank. The top companies in this portfolio include Macquarie Infrastructure Corp, XPO
Logistics Inc., AbbVie Inc., Lowe’s Companies Inc., Inphi Corp, and many more. While they are
also diversified across the technology, healthcare, consumer cyclical, industrials, and utilities
sector.

Figure 4.

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Apple (AAPL) – Lead Analyst: Kaitlin Siech
Sector: Technology
Industry: Consumer Electronics

Overview

Apple offers both financial and an institutional strength. A company thriving off of brand
loyalty created by their constant innovation and high dollar products is also backed up with
strong financials. Apples $900 billion company with diversified assets and constant innovation
has the strength to withstand adversities dealt by the market place. In evaluating Apple’s intrinsic
value, I have found that it is undervalued by the market. As value investors I believe we should
retain our shares of Apple stock.

Social Screen
Apple has made positive advancements in the effort to be environmentally friendly. They have
spent a significant amount of capital to research their carbon footprint and produce alternative
options that better suit the environment. An example would be that all Apple manufacturing
plants are operated through renewable energy. There has been controversy in the past over Apple
and their suppliers hiring habits. By outsourcing manufacturing to China, apple is able to avoid
the stricter American labor laws. There have been numerous complaints both about apple and
their suppliers paying employees’ wages so low that they need to work 60+hours a week just to
cover the bills. (Oster). This does not pass the catholic social teaching portion of paying a just
wage. Apple receives a moderate score on the social screening evaluation. They should be
rewarded for taking initiative to become sustainable but also should be discouraged to treat
employees poorly.
Qualitative Analysis
A significant advantage for Apple is their economic moat. This moat is derived from the
advantage over competitors to maintain market share and continuously drive profits. Apples
competitive advantage can be assessed through the Porters Five Forces. Looking at industry
competition there is no company that can be directly compared to Apple. Google and Samsung
would be the closest comparisons. In the tech industry brand loyalty is high and Apple
capitalizes off of it. The bargaining power of buyers is moderately low. For a company with
more than $700 billion in market capitalization individual demand is not as important. One
single customer switching to a google or Samsung device will go unnoticed by Apple. The
bargaining power of suppliers is extremely low. There are many options for suppliers and all
would greatly accept the opportunity to do business with Apple. The threat of a new entrance is
also extremely low in the technology industry. The price to form a company with the production
capacity to compete with Apple is extremely high. Through this analysis we see that Apple has a
very large economic moat which has allowed them to keep such high earnings.

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Quantitative Analysis
When analyzing the intrinsic value of the stock, two major reoccurring elements required
attention. The first is that Apple is currently sitting on $268.9 billion of excess cash that
shareholders are pressuring them to payout. The second consideration is the economic moat
which will allow Apple to continue growing at such high levels.
The first model I used to valuate Apple is the dividend growth model as seen in Figure 5. Since
Apple has that cash they need to give back to shareholder I believe their dividends will grow
15%. Apple currently has a very small dividend payout ratio and they have room to grow
dividends significantly. By year 2035 I believe that Apples dividend growth rate will reach a
constant of 9.08% which was calculated through the implied dividend growth formula. I believe
they will be able to maintain this high of a growth due to their significant returns created by their
economic moat.
The second method I used to valuate Apple is the residual value model as seen in Figure 6. A key
aspect in the model is the ability to account for buybacks rather than just dividends. I believe a
significant portion of apple returning money to the shareholders will be through buybacks. Apple
has held a consistently strong return on equity ratio over the past decade. I believe in this period
of deregulation we will see an elevated return on equity. I believe Apple will create a 51% return
on equity by year 2023 and then decrease to a constant 25% by year 2042. As for the total payout
rate, unless Apple choses to purchase another company, I believe they will pay out 50%-60% of
their retained earnings to the shareholders. This is to keep the shareholders happy as they have
expressed disapproval to apple just sitting on such a large quantity of cash.
I believe we should re-buy apple. The economy is in a period of deregulation. With Apples
financial strength they are in a position for significant growth. I believe the growth with be
consistent through this presidential term. Apple is a household product in America. Their
consistent innovation in combination with brand loyalty has created a powerhouse company. I
believe we should continue our investment.
Figure 5.

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Figure 6.

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Ford (F) – Lead Analyst: Joseph Shealy
Sector: Automobiles
Industry: Automotive

Overview
Ford was founded in 1903 by Henry Ford. It is currently one of the three largest automakers in
the United States, with headquarters located in Dearborn, MI. Ford operates 62 factories
worldwide, employing around 201,000 employees. Ford’s core business stems from the
manufacturing, marketing, and servicing of various brands of automobiles including Ford cars,
trucks, and SUVs, as well as Lincoln luxury vehicles. Another area of Ford’s business model
includes Ford Motor Credit Company which assists customers in the purchase of automobiles
and assists in the growth of their core business. Relevant current changes to Ford’s business
model includes removing all car models, except the Focus and Mustang models from U.S.
markets. Company statements indicated that by 2020 almost 90% of the Ford portfolio in North
America will be trucks, utilities and commercial vehicles. The movement away from cars
towards increasingly demanded brands stems from Ford’s movement to make the company more
“physically fit” in order to withstand factors outside its control such as currency and commodity
prices. The current automotive industry is rapidly changing requiring automakers such as Ford to
develop and implement new forms of technology such as electrification, autonomy, and mobility.
Transition towards these factors is key for the health of Ford moving forward.
Social Screen
Ford passes all social screens which were placed on the portfolio. Ethisphere which awards
companies for their ethical responsibility placed Ford on their list of the 124 most ethical
companies in the world for 2017, this being Ford’s eighth straight year on the list. The
companies are chosen by Ethisphere through a detailed 200 question survey which is verified
with the SEC. Specific actions which have allowed Ford to achieve this ethical recognition come
from its commitment to various programs including programs aimed at monitoring human rights
and safe working conditions, sourcing conflict-free minerals, to programs such as the Partnership
for a Cleaner Environment, which is aimed at encouraging sustainability through Ford’s supply
chain.
Qualitative Analysis
While Ford still remains an industry leader within the automotive industry the nature of this
industry is changing rapidly. It is vital that Ford is able to change and adapt to consumer
preferences as the automotive industry transforms. Ford has significant investments in the
development of technology for electrification, autonomy, and mobility of vehicles, keys to the
future of their business. It is important to recognize however that Ford carries more debt than the
average company within their industry, portraying how highly leveraged they currently are. Ford
has however showed it is willing to take decisive actions in order to better position themselves
for the future, most notably cutting their car brand in the U.S. allowing them to eliminate around

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$25.5 billion worth of current costs and focus on sectors they have a competitive advantage in.
Some risk factors from Ford moving forward include the acceptance of new models, increasing
tariffs, increasing commodity prices, and currency movements. Much of this risk stems from the
fact that 40% of Ford’s sales come from outside the U.S.
Quantitative Analysis
For Ford two valuation models were used in order to evaluate the future stock price. The first
being the dividend discount model demonstrated in Figure 7, and the second being free cash flow
to the firm as seen in Figure 8. The dividend discount model being a good valuation measure for
Ford due to management’s goal of providing consistent dividends into the future. Within the
dividend discount model growth was determined by looking at projected profit margin growth
into the future due to management’s current focus on this figure. With recent cost cuts Ford’s
profit margin growth was assumed to be greater in the next 4 years returning to its 10 year
average of 4%. This analysis showed a projected stock price for Ford of $13.64 an 18.60%
increase from where the stock is trading at as of April 30th. The free cash flow model being a
good valuation model due to the fact it accurately portrays the cash Ford has to pay back to the
suppliers of capital after all operating expenses have been paid out a significant factor due to
Ford’s large debt position. Growth in this model had a higher decrement rate due to the fact is
was more closely based on Ford’s increase in yearly revenue. This higher rate of decrement
allows us to capture both current success Ford may obtain from its increased focus on profitable
brands while also returning to its 10 year average revenue growth rate of 1.75%. This analysis
showed a projected stock price of $16.39 a 42.29% increase from where the stock is trading at as
of April 30th.
It is my belief that Ford is a re-buy within the portfolio. Additionally, I feel given the correct
liquidity in the portfolio it would be reasonable to add to this positon. This is due to the fact that
even with Ford’s higher than average leverage within the industry management has shown it is
willing to take decisive action in order to cut costs and reposition itself within a rapidly changing
industry. This decisive action and understanding of the current market environment will allow
Ford to maintain its current market position while also being able to expand into models which
have the technological advancements that consumer’s desire.
Figure 7.
Dividend Discount Model
Year Growth Dividend Total CF Discounted CF Constant 4.00%
0 $0.60 Decrement 0.50%
1 6.00% $0.64 $0.64 $0.61 Div 0 $0.60
2 5.50% $0.67 $0.67 $0.62 Rrf 4.88%
3 5.00% $0.70 $0.70 $0.63 Rmkt 9.65%
4 4.50% $0.74 $0.74 $0.63 Beta 1.12
5 4.00% $0.77 12.8024 $13.57 $11.15 Rs 10.22%

Share Price Estimate $13.64

Current Price (04/30/18) $11.50

Percent Increase 18.60%
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Figure 8.
Free Cash Flow to the Firm (FCFF)
Intitial
Sales for Base Period 156,776
Sales Growth Rate 3.00%
Constant Growth Rate 1.75%
Operating Profit Margin 4.07%
Depriciation and Amortization (percent of revenues) 5.34%
Additional Working Capital Investment (percent of increase in revenues) 14.04%
Capital Expenditures (percent of revenues) 4.72%
Weighted Average Cost of Capital (WACC) 5.00%
Tax Rate 25.14%
Previous Revenue $154,287.00

Forecast
Revenue $161,479.28
Operating Profit Before Tax $6,572.21
Less: Taxes $1,652.25
Operating Profit After Tax (and before interest expense) $4,919.95
Plus: Depreciation and Amortization $8,627.27
Less: Additional Working Capital $660.47
Operating Cash Flow (excluding interest expense) $12,886.75
Less: Capital expenditures $7,616.64
Estimated Free Cash Flow to the Firm $5,270.11

Free Cash Flow to the Firm (FCFF)

Year Growth FCFF PV
1 4.500% $5,507.26 $5,244.81
2 4.000% $5,727.55 $5,194.65
3 3.000% $5,899.38 $5,095.50
4 2.500% $6,046.86 $4,973.98
5 2.000% $6,167.80 $4,831.68
Perpetuity 1.750% $6,275.74 $192,853.56

Value of the Firm $218,194.18

Debt Outstanding $154,287.00
Equity Value $63,907.18
Shares Outstanding 3,900
Share Price Estimate $16.39

Current Price (4/30/18) $11.50

Percent Increase 42.49%

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MasterCard (MA) – Lead Analyst: Konor Murtagh
Sector: Consumer Finance
Industry: Financials

Overview
MasterCard is the second largest firm in the credit services industry based out of Purchase, New
York. The company was started by a small group of bankers in 1966 and currently employs over
13,500 workers across the world. MasterCard is a credit payment processing company that
serves financial institutions and businesses by processing payments made by credit and debit
cards. MasterCard currently operates in every major financial market and is a leader in
innovation in the industry.

Social Screen
MasterCard passes the Catholic Social Teaching screen because of its promotion of care for
God’s Creation as well as Option for the Poor and Vulnerable. MasterCard is dedicated to being
as environmentally friendly as possible. Their buildings are LEED certified meaning that they
are built as energy efficiently as possible. Their practices work to cut down on paper waste as
much as possible by doing more transactions and processes electronically. MasterCard also has
programs designed to help their clients become more environmentally friendly by digitalizing as
many of their processes as possible. They also work to promote the welfare of their community
members by sponsoring organizations like American Corporate Partners. MasterCard currently
has 150 employees that serve as yearlong mentors to those in the military who are transitioning
back to civilian life. MasterCard also has mentoring programs for women working within the
company. MasterCard works with it suppliers and customers in order to bring mentorship
programs to their companies as well. They also have a Girls4Tech education program designed
to encourage girls to pursue careers in STEM fields in multiple countries across the globe.
Forbes has rated MasterCard as one of the top companies that practices diversity and inclusion in
their hiring practices.
Qualitative Analysis
Competitive Rivalry is high due to MasterCard’s size they are in an economic moat compared to
other credit companies in the industry. Their main competitors are Visa however, the rise of
Paypal, Venmo, and Cash apps provides more competition especially for young consumers and
retailers looking to avoid processing fees. In order for MasterCard to keep its competitive edge
by providing outstanding customer service. MasterCard, Visa, and American Express all offer
similar products and interest rates. MasterCard has to push to continue to cut operating costs
through digitalization and provide the best customer experience possible in order to continue to
grow. MasterCard’s revenues are comprised of 65% global operations and 35% domestic.
MasterCard has experienced problems gaining further access to the Chinese market as China has
implemented protective policies to ensure the competitiveness of its domestic companies. Similar
measures have been made in countries throughout South America as well. The company is also
facing an increase in regulations from the United Kingdom as well as the European Union. These

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regulations are specifically aiming to insert more central bank control over payment oversight.
These regulations would lead to more examination requirements as well as stricter standards for
authentication of transactions. This could lead to customers abandoning more transactions if
authentication processes become more problematic. An increase in regulation of internet and
digital transactions in the US could impact MasterCard ability to process transactions related to
fantasy sports and gambling. MasterCard will benefit from the lowering of domestic tax rates in
the future.

Quantitative Analysis
MasterCard was evaluated using the residual valuation model. The model estimated the future
growth and price valuation of MasterCard’s stock. MasterCard has been taking on debt in the last
five years and using the money to buy back shares. MasterCard has a five year monthly beta of
1.18 that was used when calculating a discount rate. This was done because MasterCard has an
extremely high ROE that has not been consistent over the years. Their 2017 ROE of 80% was far
above industry average. MasterCard was evaluated using the residual valuation model. The
model estimated the future growth and price valuation of MasterCard’s stock. MasterCard has
been taking on debt in the last five years and using the money to buy back shares. MasterCard
has a five year monthly beta of 1.18 that was used when calculating a discount rate as seen in
Figure 9. This was done because MasterCard has an extremely high ROE that has not been
consistent over the years. The company has taken on debt in the last three years in order to buy
back shares and bump up the value of the stock. Their 2017 ROE of 80% was far above industry
average. I lowered their yearly ROE by 5% each year to show that their current model is not
sustainable. I recommend we sell some of our position. The current price of the stock is within
the fifteen percent margin of safety. The company cannot continue to grow at its current rate and
will slow in the next few years.

Figure 9.

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United Rentals (URI) – Lead Analyst: William Arndt
Sector: Industrials
Industry: Rental & Leasing Services

Overview
United Rentals Inc. is the largest equipment rental company in the world with over 1000 rental
locations in 49 of the 50 states and 10 Canadian provinces. Their main revenue stream is
construction and industrial equipment, but they also rent equipment in four specialty fields as
well, adding some key diversity. United Rentals keeps on growing, with them acquiring two new
companies in 2017.
Social Screen
After running a social screen on United Rentals I found that the company operates very
responsibly. Their mission, values, and actions align with the seven themes of catholic social
teaching. United Rentals core values stress safety, service, and integrity which keeps a
trustworthy company to both the buyers and the employees. They also have a good company
structure that pays attention to workers and their opportunities for upward movement in the
company. United Rentals stresses correct practice offering a multitude of training programs, with
employees averaging 43 hours of training a year. They also focus on leveling the playing field
for women within their organization as well as insisting on equal opportunity for all races.
United Rentals gives back in many ways but they focus on giving back to veterans of our
military. They created a program called STEP which focuses on helping veterans return to
civilian work life. They also partnered with veteran support programs, Fischer House
Foundation, Valour Place, Soldier Strong, and Veterans United. They have received many
awards for being one of the most supportive companies for veterans of the United States and
Canada.
Qualitative Analysis
The Threat of New Entrants is Low. Companies wanting to enter the industry face large startup
costs due to the cost of buying the equipment, as well as being able to gain any market share.
The Bargaining Power of Buyers is Low. Since United Rentals owns so much equipment they
are able to offer some of the lowest prices in the industry. Also the market of buyers is high
because it easier to rent than buy equipment for one time jobs. The buyers have little say on the
price of the rentals. The Bargaining Power of Suppliers is High. There aren’t many suppliers of
the equipment that United Rentals buys so the suppliers have the upper hand. They can dictate
the prices of equipment and United Rentals doesn’t have much choice but to accept them
regardless. The Threat of Substitutes is Moderate. United Rentals is the largest of equipment
rental companies so even though there are many companies in the industry they have the upper
hand. Equipment is very similar from company to company. Industry Rivalry is Moderate. The
equipment rental industry has a wide selection of companies to choose from but some companies

17
have competitive advantages over the others. The advantages come from higher market share as
well as new technology.
Quantitative Analysis
My residual value work started with looking at the current price of URI’s stock, which at close of
4/27/18 is 155.31 per share as seen in Figure 10. This stock has been doing quite well in the last
year, up almost $100 a share since it was bought by the Loras endowment portfolio. The
valuation starts with trying to come up with forecasting the future ROE. I have URI’s ROE going
down this year and dropping every year for the next five until they hit 20% which is their
economic moat due to the industry they are in. I have forecasted a 35.25% ROE for 2018 then
dropping 5% every year for the next 3 years. They will drop at this rate because they have grown
exponentially in the last few years and have finally hit their peak ROE. After the next three years
their ROE decline will slow to one percent a year until it hits the economic moat of 20%. I have
calculated their required rate of return to be at 15% based on a 2.0 beta and the basic CAPM
model. The ROE is so high already because of the bull market of the last year and their new
acquisitions. It will drop a few percent because they have finally hit their peak even though their
revenue will continue to grow within the next few years. The new tax rate of 21% will help
United Rentals continue to make more and more profits. After all calculations I came to a final
PV per share of $199.20 which given the recent drop in stock price means that URI is on sale
right now, even more than it was at the start of 2018. Since United Rentals doesn’t give out
dividends I had to use their buybacks to calculate dividend payout ratio and the potential for
future dividend payouts. The stock is selling at a discount at the moment and with the market and
past volatility of the stock I believe it will continue to rise. My recommendation: Buy/Hold
Figure 10.

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Bell Canada Enterprise (BCE) – Lead Analyst: Samantha Pietruszynski
Sector: Information & Communication Technology
Industry: Telecommunications Services

Overview

Bell Canada Enterprise (BCE) is Canada’s largest communications company that operates under
three segments: Bell Wireline, Bell Wireless, and Bel Media. Bell Wireline provides data, such
as Internet access and Internet protocol television (IPTV), local and long distance telephone, as
well as other communication services and products to residential, small and medium-sized
businesses, and enterprise customers. Bell Wireless provides wireless voice and data
communication products and services to customers, while Bell Media focuses on digital media,
radio broadcasting services, out-of-home advertising services, and various other media services
to customers across Canada. Approximately 95% of their business occurs in Canada, while the
other 5% is services based in the United States. The company is headquartered in Montreal
Canada, with a market capitalization of 38.652 billion.

Social Screen

Bell Canada Enterprise has an impressive resume when it comes to corporate responsibility. BCE
is growing the global conversation related to the support of individuals with mental health issues.
Bell Let’s Talk launched in September 2010 as a five-year, $50 million program to help create a
stigma-free Canada and drive action in mental health care, research, and the workplace. BCE
also launched Portico Network, which is an online interactive platform that connects health
providers to the latest clinical tools, resources, and information about treating individuals with
mental illness. In 2018, Bell Let’s Talk set new records with around 138,000,000 million
calls/text/social media posts of support for mental health. The commitment of BCE to this issue
resulted in $6 million in community fund grants, approximately 1.8 million Canadians receiving
help, and the statistics continue to grow. BCE is also recognized for its environmental
performance, by being the first telecommunications company in Canada to obtain an ISO 14001
certification for its environmental management system. BCE continues to be recognized as a
great place to work by maintaining a diverse work environment and excellence in the overall
governance of the company.

Qualitative Analysis

An important model used to analyze BCE qualitatively was the Porter’s Five Forces. The threat
of new entrants in the industry is moderate, due to regulatory approval of the Federal
Communications Commission or high licensing costs. BCE is a well-established company,
therefore, has a low threat of new entrants due to the fact they already have access to large
amounts of finance to continue their operations efficiently. The bargaining power of buyers is
high. Telephone and data services do not vary much, and can often be viewed as a commodity.
Customers can put pressure on prices, which can negatively impact the financial success of BCE.
The bargaining power of suppliers is moderate. BCE has strong cost reduction objectives and
good relationships with its suppliers, but negotiations may not always be successful and could
lead to possible operational risks. The threat of substitutes is high. Many of the products and
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services offered by one company is usually offered by the other. BCE has a strong customer
base, and continually sees an increase in customers each year, and must maintain those
customers to remain a top competitor. The intensity of rivalry is high. Industry profitability tends
to be low due to price wars or service differentiation. BCE continues to innovate their
technologies and offer a wide variety of new services to their clients. BCE is creating pressure in
the industry by expanding into other cities and evolving its technologies to drive new services
and demand in the market.

Quantitative Analysis

BCE finished strongly in 2017, which exemplified the company’s financial discipline in a highly
competitive marketplace. The revenues generated for BCE primarily come from the Wireless
(34%) and Wireline (54%) segments of their business, while the other 12% is generated from
their Media segment. BCE’s PE ratio for 2018 is 19.38, which is just slightly above the average
PE ratio of 18.14 over a 5-year period. An important ratio to examine is the adjusted EBITDA
Margin, which increased by 4.4% in 2017. Despite a higher EBITDA, BCE’s net earnings in
2017 decreased due to depreciation and amortization expenses, acquisition costs, and increased
interest expense. BCE witnessed an impressive 2017 in terms of operating revenue. Operating
revenue increased by 4.6%, which was led by the growth of the Wireless and Wireline segments.
The acquisition of Manitoba Telecom Services Inc. (MTS) generated higher service revenues for
BCE, as did the acquisition of Alarmforce, which allowed BCE to achieve both operational
savings and pursue new opportunities in the Connected Home marketplace.

The first model used to value BCE was the dividend discount model. As seen in Figure 11, BCE
was valued at $76.72 using this method. Given the 4.6% increase in revenues in 2017 for BCE, a
conservative growth rate of 3% was used to project next year’s growth rate using the Gordon
Growth rate model. BCE’s growth rate would then decrease every year, until it reached a
constant rate of 2.52%. BCE has the largest gigabit Internet service footprint in Canada, and
continues to push growth opportunities to expand that footprint. The required rate of return used
was 6.64%. BCE paid out a $0.74 dividend, which increased by 5.2% from last year. According
to this method, BCE appears to be undervalued with growth potential in the future.

The second model used was the residual income model seen in Figure 12. The assumptions used
were a market rate of 9.65%, risk-free rate of 4.88%, and a 5-year monthly Beta of 0.37. BCE’s
dividend payout ratio is 73.50%. The 10-year average of ROE for BCE was calculated as
14.97%, but the 5-year average ROE of 16.30% was used to project the constant ROE over time.
The ROE was then projected to increase each year, until it reached 16.30%, which is still above
the industry average. Given an initial book value of $17.30, the value per share of BCE was
projected to be $70.64. Using this model, the result suggests BCE stock is undervalued.

Given the results of two quantitative methods, BCE stock is undervalued and I recommended
that we purchase 250 shares of BCE stock, which added up to approximately $10,000 in
allocation within the portfolio.

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Figure 11.

Figure 12.

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Cisco Systems Inc. (CSCO) –Lead Analyst: Maria Munoz-Mosquera
Sector: Information technology
Industry: Networking hardware

Overview
Cisco Systems Inc. is an American networking hardware-company with presence in 165
countries. With over three decades of experience, this company positions itself as the largest
networking company in the world. Through its core capabilities –networking, security,
collaboration, and the cloud –Cisco is able to offer a comprehensive product portfolio and add
value to its customers. Cisco, while seeing security as a necessity in the era of digitalization, is
increasingly taking steps towards building a threat-centric security infrastructure within its
products. Indeed, it is because of the company’s conscious efforts to invest in its cybersecurity
capabilities, along with the increasing need for global network safety, that Cisco evidences
potential for growth and long term returns.
Social Screen
Cisco passes our portfolio’s social screen, while adhering to the CTS principles, and while
ranking first on Barron’s 100 Most Sustainable Companies (2018), and third on Fortune’s 50
Best Workplaces for Giving Back (2018). Cisco implements a broad range of corporate social
responsibility initiatives, while having three outlined foci: people, society and the planet.
Regarding people, Cisco works towards inclusion and collaboration within the company through
encouraging employee engagement and volunteering. Likewise, Cisco creates an impact on the
communities where it is present by providing Cisco Networking Academy, an educational
program that prepares students for entry-level positions –having helped more than 7.8 million
students in two decades. Besides this, Cisco contributes to society, through funding nonprofit
partners that work towards providing disaster relief, educational opportunities and economic
empowerment. By the same token, the company has an internal Human Rights Working Group,
and makes sure that it sources raw materials responsibly. Finally, when it comes to the planet,
Cisco focuses on reducing its greenhouse gas emissions through its supply chain —having
reduced its worldwide emissions by 40% within five years; furthermore, the company has made
a conscious effort to utilize electricity from renewable sources, and has invested more than $50
million in renewable energy projects.
Qualitative Analysis
Cisco’s relative sustainability and profitability can be assessed through viewing the company’s
standing within Porter’s Five Forces. First, rivalry among existing competitors is high for Cisco,
because given the exponential growth evidenced by the technology industry and its incontestable
attractiveness, competitors are very aggressive at innovating, as well as at integrating their
marketing efforts. Without a doubt, Cisco is faced with substantial competition, especially given
today’s low level of differentiation within technology products. Nonetheless, Cisco finds itself at
a somewhat suitable position when it comes to the threat of new entrants; in effect, within the

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networking hardware industry, there is a moderate threat of new entrants, because there are high
costs regarding brand development, at the same time that there are substantial costs for doing
business. Yet, entry to the industry is eased by the relatively low initial capital requirements.
Besides this, Cisco benefits from the low threat of substitute products, namely due to the fact that
it is difficult to find non-computer network solutions in the market. Furthermore, Cisco’s
supplier power is moderate, as there is a limited number of suppliers, as well as the possibility of
manufacturing issues from the suppliers’ side – situations which exert a considerable amount of
pressure on the company. However, Cisco implements purchase commitments with contract
suppliers in order to hedge the risk related to shortages in raw materials. Finally, with regards to
customer bargaining power, Cisco faces a moderate force, as customers can easily change from
one company to another; however, because there are switching costs associated with doing this –
in the form of time investment, network disruptions, and monetary costs –customers might be
prone to stick with Cisco’s products. Aside from Cisco’s specific position within Porter’s Five
Forces, two potential economic moats can be identified for the company. Certainly, given that
Cisco is consistently listed in the top 20 R&D spenders worldwide, and that it has a reputation
for standard and innovation, it can be said that the company has an economic moat related to
intangible assets, i.e. brand equity. Likewise, it can be said that the company possesses an
economic moat based on customer switching costs, which as mentioned before, means that
customers aren’t quite prone to changing technology vendors.
Quantitative Analysis
Cisco’s intrinsic stock valuation was estimated while using two models. The first valuation
method taken into account was the dividend discount model, considering a fifteen-year
timeframe. For this model, a discount rate of 10.32% was used, derived from applying a risk-free
rate of 4.88%, a market return rate of 9.65%, and a beta of 1.14. The first year’s dividend growth
was estimated based upon a detailed view on historic revenue, income and dividend growths,
yielding a value of 10.93%, as seen in Figure 13. Thereafter and until year 6, growth rates were
generously augmented by an incremental growth of 0.5% per year, reaching 20.93%. While
being considerably high dividend growths –those from year 2 to year 6, they represent the
significant potential development of the technology industry in the near future. After year 6
dividend growth rates were reduced by 1.86% each subsequent year, until year 15, when a
sustainable growth was attained. The drastic reduction in growth rates for Cisco’s dividends was
estimated while predicting an increased competition and the development of alternative
technologies within the industry, for this specific time period. Finally, Cisco’s sustainable
growth for year 15, was calculated while forecasting a payout ratio of 62% for such year, along
with an ROE of 11.47% –arrived to by breaking down the ROE in through the DuPont analysis,
and doing an estimate of each of the variables. According to this valuation method, Cisco’s stock
should be selling at $51.29.
The residual income model was the second valuation method used to estimate Cisco’s stock
value. Similar to the model presented above, the discount rate used was of 10.32%. In addition to
this, a dividend payout ratio of 50% was assumed, and an initial book value of $13.73 was
obtained –using Cisco’s equity and share information from its latest 10-k filing. As seen in

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Figure 14, a 20-year period was considered, along with a forecast ROE of 20% for year 1. This
ROE, although optimistic, seemed reasonable given the high ROEs achieved by the company in
the past five years. After year 1, it was assumed that the forecast ROE would decrease by 0.45%
each year, settling at 11.47% in year 20. Year 20’s ROE was set to remain above the discount
rate, based on the assumption that Cisco possesses an economic moat related to intangible assets
and switching costs. While using the residual income model, Cisco’s value per share resulted in
$26.47.
According to Cisco’s qualitative valuation, the company has potential for improving its
performance and profitability, in the face of positive market conditions. However, given Cisco’s
quantitative valuation, the stock does not appear as an attractive investment. Consequently and as
for right now, the decision to purchase Cisco’s stock should be considered in more detail.

Figure 13

CISCO

Growth Year Dividend Term Value Total CF Discounted CF Value today Current Dividend (17) $ 1.13
0 $ 1.13 Rm 9.65%
10.93% 1 $ 1.25 $ 1.25 $ 1.14 Rrf 4.88%
11.93% 2 $ 1.40 $ 1.40 $ 1.15 Beta 1.14
13.43% 3 $ 1.59 $ 1.59 $ 1.19 Rs 10.32%
15.43% 4 $ 1.84 $ 1.84 $ 1.24 Decrement yr 6-15 1.84%
17.93% 5 $ 2.17 $ 2.17 $ 1.33 Incremental G yrs 1-6 0.50%
20.93% 6 $ 2.62 $ 2.62 $ 1.45 Sustainable growth 4.36%
19.09% 7 $ 3.12 $ 3.12 $ 1.57
17.25% 8 $ 3.66 $ 3.66 $ 1.67
15.41% 9 $ 4.22 $ 4.22 $ 1.74
13.57% 10 $ 4.80 $ 4.80 $ 1.80
11.72% 11 $ 5.36 $ 5.36 $ 1.82
9.88% 12 $ 5.89 $ 5.89 $ 1.81
8.04% 13 $ 6.36 $ 6.36 $ 1.77
6.20% 14 $ 6.75 $ 6.75 $ 1.71
4.36% 15 $ 7.05 $ 123.41 $ 130.46 $ 29.91 $ 51.29

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Figure 14.
CISCO RESIDUAL INCOME MODEL
Rm 9.65% ROE 2018 20.00%
Rf 4.88% ROE 2031 11.47%
Beta 1.14 ROE -g 0.45%
R 10.32%
Div payout 50.00%
T. Equity $ 66,137,000,000
# shares 4,817,517,410
Initial Book $ 13.73

Year Forecast ROE R Initial Book Forecast EPS Forecast DIV Ending Book Value Expected EPS Residual Income PV RI Term Value PV Term
1 20.00% 10.32% $ 13.73 $ 2.75 $ 1.37 $ 15.10 $ 1.42 $ 1.33 $ 1.20
2 19.55% 10.32% $ 15.10 $ 2.95 $ 1.48 $ 16.58 $ 1.56 $ 1.39 $ 1.15
3 19.10% 10.32% $ 16.58 $ 3.17 $ 1.58 $ 18.16 $ 1.71 $ 1.46 $ 1.08
4 18.65% 10.32% $ 18.16 $ 3.39 $ 1.69 $ 19.85 $ 1.87 $ 1.51 $ 1.02
5 18.20% 10.32% $ 19.85 $ 3.61 $ 1.81 $ 21.66 $ 2.05 $ 1.57 $ 0.96
6 17.76% 10.32% $ 21.66 $ 3.85 $ 1.92 $ 23.58 $ 2.24 $ 1.61 $ 0.89
7 17.31% 10.32% $ 23.58 $ 4.08 $ 2.04 $ 25.63 $ 2.43 $ 1.65 $ 0.83
8 16.86% 10.32% $ 25.63 $ 4.32 $ 2.16 $ 27.79 $ 2.64 $ 1.68 $ 0.76
9 16.41% 10.32% $ 27.79 $ 4.56 $ 2.28 $ 30.07 $ 2.87 $ 1.69 $ 0.70
10 15.96% 10.32% $ 30.07 $ 4.80 $ 2.40 $ 32.46 $ 3.10 $ 1.70 $ 0.64
11 15.51% 10.32% $ 32.46 $ 5.04 $ 2.52 $ 34.98 $ 3.35 $ 1.69 $ 0.57
12 15.06% 10.32% $ 34.98 $ 5.27 $ 2.63 $ 37.62 $ 3.61 $ 1.66 $ 0.51
13 14.61% 10.32% $ 37.62 $ 5.50 $ 2.75 $ 40.36 $ 3.88 $ 1.62 $ 0.45
14 14.16% 10.32% $ 40.36 $ 5.72 $ 2.86 $ 43.22 $ 4.16 $ 1.55 $ 0.39
15 13.71% 10.32% $ 43.22 $ 5.93 $ 2.96 $ 46.19 $ 4.46 $ 1.47 $ 0.34
16 13.27% 10.32% $ 46.19 $ 6.13 $ 3.06 $ 49.25 $ 4.77 $ 1.36 $ 0.28
17 12.82% 10.32% $ 49.25 $ 6.31 $ 3.16 $ 52.41 $ 5.08 $ 1.23 $ 0.23
18 12.37% 10.32% $ 52.41 $ 6.48 $ 3.24 $ 55.65 $ 5.41 $ 1.07 $ 0.18
19 11.92% 10.32% $ 55.65 $ 6.63 $ 3.32 $ 58.96 $ 5.74 $ 0.89 $ 0.14
20 11.47% 10.32% $ 58.96 $ 6.76 $ 3.38 $ 62.35 $ 6.08 $ 0.68 $ 0.10 $ 2.20 $ 0.31

Total PV RI $ 12.43
PV Term $ 0.31
Beginning Book $ 13.73
Value per Share $ 26.47

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Future Recommendations
As the class continues to further evaluate the companies within the portfolio, each individual
recommendation will be considered and fulfilled upon agreement of the class. Diversification is
an important element needed in our portfolio, and we will continue to expand in other sectors or
industries. With the new addition of Bell Canada Enterprise, our goal was to expand our
investments internationally and consider companies located outside the United States. The
investment in BCE also offered insights into smaller to mid-cap companies, which increased the
diversity in our portfolio. The class would also like to add limit orders in the future to buy more
shares of companies in our portfolio we believe are still trading at a discount. Overall, the
portfolio has continued to positively impact Loras College, and the educational advancement of
its finance students. This class has prepared its students for real-life investing, and to ethically
determine smart, value investing.

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