Post About Equity Valuation: Applications and Processes
From this list of companies to research, choose the three which you find most interesting, then address items A-J (below) in your discussion. For reference in the instructions, consider your three firms to be Company I, Company II and Company III respectively.
What is Company I’s relative competitive position within its industry, and what is its competitive strategy? How is this strategy different from other companies in the industry? How well has the company executed its strategy and what are its prospects for future execution? Review the annual reports from 10 years prior, 5 years prior, and the most recent two years and explain how management has historically foreseen challenges and has adapted to changes in business conditions through time. Give specific examples.
How attractive are the prospects for inherent industry profitability and sustained profitability for the industry in which Company I operates? Discuss the economic factors that may affect demand for the goods and/or services provided by companies in that industry. How will competitive pressures and other forces affect Company I’s position in that industry? Explain a logical framework for analyzing and forecasting revenue for Company I.
Review the annual reports from 10 years prior, 5 years prior, and the most recent two years and explain the level and trend in efficiency and profitability for Company I.
Examine efficiency in terms of revenue per employee, total asset turnover, and the turnover ratios for inventory and accounts receivable (SEE BELOW FOR HOW TO COMPUTE THESE).
Examine profitability in terms of the behavior of gross margin, operating margin, and net profit margin (SEE BELOW FOR HOW TO COMPUTE THESE).
What is Company II’s relative competitive position within its industry, and what is its competitive strategy? How is this strategy different from other companies in the industry? How well has the company executed its strategy and what are its prospects for future execution? Review the annual reports from 10 years prior, 5 years prior, and the most recent two years and explain how management has historically foreseen challenges and has adapted to changes in business conditions through time. Give specific examples.
How attractive are the prospects for inherent industry profitability and sustained profitability for the industry in which Company II operates? Discuss the economic factors that may affect demand for the goods and/or services provided by companies in that industry. How will competitive pressures and other forces affect Company II’s position in that industry? Explain a logical framework for analyzing and forecasting revenue for Company II.
Review the annual reports from 10 years prior, 5 years prior, and the most recent two years and explain the level and trend in efficiency and profitability for Company II.
Examine efficiency in terms of revenue per employee, total asset turnover, and the turnover ratios for inventory and accounts receivable (SEE BELOW FOR HOW TO COMPUTE THESE).
Examine profitability in terms of the behavior of gross margin, operating margin, and net profit margin (SEE BELOW FOR HOW TO COMPUTE THESE).
What is Company III’s relative competitive position within its industry, and what is its competitive strategy? How is this strategy different from other companies in the industry? How well has the company executed its strategy and what are its prospects for future execution? Review the annual reports from 10 years prior, 5 years prior, and the most recent two years and explain how management has historically foreseen challenges and has adapted to changes in business conditions through time. Give specific examples.
How attractive are the prospects for inherent industry profitability and sustained profitability for the industry in which Company III operates? Discuss the economic factors that may affect demand for the goods and/or services provided by companies in that industry. How will competitive pressures and other forces affect Company III’s position in that industry? Explain a logical framework for analyzing and forecasting revenue for Company III.
Review the annual reports from 10 years prior, 5 years prior, and the most recent two years and explain the level and trend in efficiency and profitability for Company III.
Examine efficiency in terms of revenue per employee, total asset turnover, and the turnover ratios for inventory and accounts receivable (SEE BELOW FOR HOW TO COMPUTE THESE).
Examine profitability in terms of the behavior of gross margin, operating margin, and net profit margin (SEE BELOW FOR HOW TO COMPUTE THESE).
For companies I, II and III, identify any aspects of reported performance that are unlikely to recur and reporting decisions that may result in a level of reported earnings that is unlikely to continue and comment on how this informs you about the quality of earnings for the company.
DEFINITIONS FOR COMPUTATIONS:
Please compute your figures according to these definitions
Revenue per Employee = Total revenue divided by number of employees (frequently given in the 10-k).
Total Asset Turnover = Total revenue divided by total assets on the balance sheet (This is a component of the DuPont Identity).
Inventory Turnover Ratio = COGS divided by the average of current inventory & prior year inventory (put N/A if the company does not sell inventory).
Accounts Receivable Turnover Ratio = Total revenue divided by the average of current accounts receivable & prior year accounts receivable (put N/A if the company does not sell on account). Note that accounts receivable is sometimes referred to as trade receivables. (Put N/A if the only accounts receivable are credit card receivables).
Gross margin = Gross profit divided by total revenue (Gross profit is revenue minus direct costs, such as COGS or Cost of Sales. Gross profit is not affected by indirect costs and overhead costs, such as selling, general and administrative costs).
Operating margin = Operating Profit divided by Total Revenue (Operating profit my not be the same as EBIT. Operating profit is revenue minus total operating costs, but is not affected by non-operating costs such as impairments, gains/losses from sales of assets, etc.).
Net profit margin = Net Income divided by Total Revenue (This is a component of the DuPont Identity).
Companies to Research
These are the companies we are focusing on this term:
Target Corporation (TGT) – Retailer
Dollar General Corp. (DG) – Retailer
GameStop Corp. (GME) – Retailer
AMC Entertainment Holdings Inc. (AMC) – Service Provider
Darden Restaurants, Inc. (DRI) – Service Provider
Planet Fitness Inc. (PLNT) – Service Provider
Alphabet Inc. (GOOGL) – Service Provider
PepsiCo, Inc. (PEP) – Manufacturer
International Paper Company (IP) – Manufacturer
3M Company (MMM) – Manufacturer
