Meeting Agenda

Announcements Market Overview + Lecture: Clean Energy Portfolio Update Pitch: AGX Important Dates

Announcements

Announcements

•Build and manage your own virtual portfolio• Compete with other McCombs students

• Top three winners receive prizes in January

Register at usiteam.org/even

ts

Fall Portfolio Challenge

$5entry fee

Announcements

• Pitch a stock to a panel of industry professionals• Network with investors across the country

• Win $2500 in cash prizes

Saturday October 19SP

www.usiteam.org/events

THE TEXAS STOCK PITCH COMPETITION2013TX

Announcements

WorkshopsEvery Thursday 7-8PMSAC2.120

Topic this week:• Comps Analysis

Announcements

Free Wall Street Journal digital access for paid members

Contact treasurer@usiteam.org to receive login information

Market Overview: General News

Market Overview: General News

Market Overview: Clean Energy

Solar

Energy Smart Tech

Wind

S&P500

Market Overview: Clean Energy

Market Overview: Clean Energy

Japanese Energy Demand

What’s driving the clean energy rally?

Desire to cut fossil fuel consumption

China-EU trade dispute

Cutting Alternative Consumption

Saudi Arabia could invest 109B into solar to reduce domestic oil consumption

Japan is looking to fill the void left by a struggling nuclear program and stop using costly LNG imports

Japan Energy Consumption

Japan Energy Consumption

Japan Energy Consumption

Tariffs:

• What effect do tariffs have on:– Domestic producers– Foreign producers– Domestic energy prices

China-EU Dispute

• China announced tariffs on disposals for American and Korean solar polysilicon manufacturers

• US did this to China in 2012

• EU had tariffs up to 67%

• Effect on Chinese manufacturers?

China-EU Dispute

If tariffs expire or go down:

Sanity Check: What does it all mean?

• Expect to see Chinese producers buy domestic EU manufacturers to avoid tariffs

Acquisitions drive up stock prices in the industry (paying for control)

Discussion

• Opinion on the rally in solar/clean energy?– Will it last?– Is it too late to invest?– Any other factors to drive the rally?

Portfolio Update

Historical PerformanceInvested Capital Cash Exposure AUM Weekly Portfolio Return Cumulative Return Since 8/30/13 Exp-Adj Weekly Return Exp-Adj Cum. Return

8/30/2013 $4,396.8 $9,716.0 31.2% $14,112.8 - 0.0% 0.0%9/6/2013 $7,739.3 $6,556.9 54.1% $14,296.2 1.3% 1.3% 2.40% 2.4%9/13/2013 $4,328.6 $9,922.9 30.4% $14,251.5 (0.3%) 1.0% (1.03%) 1.3%9/20/2013 $4,381.9 $9,922.9 30.6% $14,304.8 0.4% 1.4% 1.22% 2.6%

Portfolio UpdateSector Exposures Dollar Amount % AllocationInformation Technology $1,526.32 40%Energy $0.00 0%Consumer Services $0.00 0%Consumer Goods $0.00 0%Financials $440.00 11%Industrials $0.00 0%Health Care $1,281.00 33%Utilities $0.00 0%Basic Materials $613.75 16%

Sector Exposures + CashInformation Technology $1,526.3 11%Energy $0.0 0%Consumer Services $0.0 0%Consumer Goods $0.0 0%Financials $440.0 3%Industrials $0.0 0%Health Care $1,281.0 9%Utilities $0.0 0%Basic Materials $613.8 4%Cash $9,922.9 72%

11% 0% 0% 0%

3% 0%

9%

0%

4%

72%

Information Technology

Energy

Consumer Services

Consumer Goods

Financials

Industrials

Health Care

Utilities

Basic Materials

Cash

Portfolio Update

University Securities Investment TeamArgan, Inc. (NYSE: AGX)

Manideep RaviDanial Bhatti

Kristi SparrowCarl Koehler

September 24, 2013

Strategic Capital Group

Company Overview

• Holdings Company in NE United States• Gemma Power Systems• Southern Maryland Cable

• Designs and builds power plants• Natural gas, shale, and alternative energy

Strategic Capital Group

Investment Thesis

• Under the radar of most investors• Current projects have very high potential• Special cash dividend ($0.75) recently

announced

Market Cap = 299.12 MCurrent Stock Price = 21.34Beta = 1.04Current Ratio = 2.7752 wk Hi/Low = 13.90-21.90

Strategic Capital Group

The Moxie Plants

• Two natural gas power plants in the Marcellus Shale Region of Pennsylvania

• Believed to hold the largest amount of natural gas in the United States

• Zero delivery costs• East Coast is a high demand market

Strategic Capital GroupIndustry and Market Overview Engineering,

Procurement & Construction

• Unbundling of natural gas for consumers• Heavily based on long-term contracts• Capital Intensive• Competing with very large firms• Competitive bid environment

Strategic Capital Group

Risks & Mitigating Factors

Economic uncertainty in construction

and manufacturing

Competition from much larger firms

Existing coal-fired power plants are difficult to

unseat

Slowed post-recessionary demand for

energy

Strategic Capital Group

Management

• Management owns 11% of shares in the company

• Executive compensation is heavily skewed towards equity

• Committed to taking only high-margin projects

CEO & Chairman – Rainier BosselmannCFO – Arthur Trudel

Strategic Capital Group

Competitors

Argan Company Comparables

Company Ticker Market Cap LTM EPS Current Stock Price P/E EV/EBITDA

Michael Baker BKR 392.2M 0.91 40.5 44.51 9.5x

Matrix Service Company MTRX 483.3M 0.9 18.38 20.42 8.3x

MYR Group, Inc. MYRG 505.9M 1.62 24.2 14.94 5.7x

Metka Group SA MTKAF 609.9M 1.47 14.35 9.76 5.5x

Tutor Perini Corp TPC 943.1M 2.38 20.26 8.51 6.4x

Dycom Industries DY 930M 1.04 28.06 26.98 7.8x

Argan, Inc. AGX 302.1M 2.24 21.51 9.60 3.1x

Avg: 20.85 6.61x

Discount: 54% 53%

Strategic Capital Group

Valuation 2011 2012 2013 2014 2015 2016Revenue $182,592.0 $141,850.0 $278,635.0 $282,641.0 $423,961.5 $466,357.65 Cost of Sales $153,469.0 $118,748.0 $226,900.0 $231,765.6 $351,888.0 $389,408.6 Gross Profit $29,123.0 $23,102.0 $51,735.0 $50,875.38 $72,073.46 $76,949.01 Gross Margin 15.9% 16.3% 18.6% 18.0% 17.0% 16.5%

SG&A Expenses $12,129.0 $11,186.0 $14,350.0 $16,958.5 $23,317.9 $25,649.7 EBIT $16,994.0 $11,916.0 $37,385.0 $33,916.9 $48,755.6 $51,299.3 EBIT Margin 9.3% 8.4% 13.4% 12.0% 11.5% 11.0%

NOPAT $11,046.1 $7,745.4 $23,265.0 $22,046.0 $31,691.1 $33,344.6 D&A $992.0 $789.0 $765.0 $741.0 $717.0 $693.0 CapEx $580.0 $1,738.0 $7,229.0 $1,512.0 $1,230.0 $1,726.0 FCF $11,458.1 $6,796.4 $16,801.0 $21,275.0 $31,178.1 $32,311.6 Present Value of Cash Flows $19,699.1 $26,730.2 $25,650.0

Terminal Value $ 387,738.9 Enterprise Value $ 335,967.8

Assumptions

WACC 8%

Tax Rate 35.0%

Exit Multiple 12.00x

Share Price $

21.54

CalculationsEnterprise Value $ 335,967.8

Less Net Debt $ (37,926.0)

Equity Value $ 373,893.8 Shares Outstanding 14,017

Value Per Share $

26.67

Implied Discount 23.84%

Important Dates

• Thursday, Sept. 26, 7-8PM- SCG Workshop #2SAC 2.120

• Saturday, October 12: Last day to register for TXSPwww.usiteam.org/events

• Saturday, October 19: Texas Stock Pitch Competition

Announcements

Saturday October 19SP

www.usiteam.org/events

THE TEXAS STOCK PITCH COMPETITION2013TX

Lecture: Multiples Analysis

ObjectivesWhat is a multiple?How is a multiple calculated?How is a multiple used?How do you evaluate a multiple?

Accounting in 2 minutes

Revenue

-Cost of Goods Sold

Gross Profit

-Operating Expenses

Operating Profit

-Taxes

Earnings

Price per unit x units sold

Cost of the inputs associated with the product

Literally the cost of the goods you sell

Cost of input per unit x units sold

Costs not associated with producing the good

Ex.) salaries paid to accountants or executives

The final residual profit after all expenses and taxes have been taken out

Also known as net income, net profit

Stock Price

AAPL

$467.41 per share

LNKD

$243.90 per share

If we want to invest in cheap stocks (buy-low-sell-high), which would you invest in?

Stock price is arbitrary!

A company wants to sell a bunch of stock onto a stock exchange to raise money (IPO)

The company needs to raise $100 million

The company gets to choose the stock price it wants to issue the stock at

1 million shares @ $100 each10 million shares @ $10 each100 million shares @ $1 each1 billion shares @ $0.10 each

Price is only used to gauge how much you make off a buy-and-sell trade. It is NOT a determinant of value

Back to multiples

• We want to figure out if an investment is cheap

Relative Valuation ExampleYour exotic friend asks you to go buy this fruit you’ve never seen for him, but to not spend too much for him.

The fruit is only sold by one vendor and costs $5 each, but you have no idea if that’s a good price. What do you do?

You compare it to other things that are like it, namely, other fruit!

You can refine your search further by comparing to other fruit that look and taste like it.

Relative Valuation ExampleYou look around and find a vendor who has a similar looking, but slightly larger fruit.

You look around and find a vendor who has a similar looking, but larger fruit, selling for $10 each.

$5 each

$10 each

In order to standardize the price and eliminate the factor of size, we can calculate the price per pound

Relative Valuation

• Much in the way price is arbitrary for fruit until you standardize it per unit of weight, stock price can be standardized per unit of earnings

Price per share

Earnings per share

Total earnings / total shares

=Tells you how much you pay per dollar of earnings

Investors tend to want to pay less for a dollar of earnings like paying less per pound of fruit

=

Price to Earnings Example

AAPL

=11.7x

LNKD

$243.90$476.41

$40.82 $.37

=676.6x

Interpreting a P/E Multiple

• Lower isn’t always better– For better, safer, growing companies,

investors are willing to “pay a higher multiple”– Sometimes a higher multiple indicates

expectation the company will “grow into it”

• Cheap has two meanings– You can get a good price– But that also means you could be getting bad

quality

Multiples Used

Price per share

Earnings per share

Price per share

Book value per share

How much you pay per dollar of earnings

How much you pay per dollar of resources of the business

Price per share

Cash Flow per shareLike P/E, but using cash flow (different from earnings)

Enterprise Value

EBITDALike P/E, but using better measurements of price and a proxy for cash flow/earnings. Most popular multiple

How to Evaluate Pitch’s Multiples