Valuation and Financial Health Assessment of a US and European Domiciled Company

Task

Task:

Concepts often seem clear when initially discussed but can break down during application due lack of a robust understanding, inconsistency of data, difficulty in estimating required parameters, and interpretation of results to name a few. In addition, the project will also provide practice in financial research, business insight and communication skills. Moreover, you should see by the end of the term that all of these topics are intertwined. That is, you cannot create a valuation without understanding the context the firm operates within (industry, management, outlook, financial health), it’s risk profile, and have some understanding of its financial policies (debt, dividend, growth).Company Selection: Choose a publically traded U.S company that is of interest to you, and a corresponding European domiciled firm (for use in Topic 7) in the same line of business. Note the following requirements when choosing your company:

• A minimum 8 year history of being publicly traded. Recent annual reports must be available for both.

• No financial institutions such as banks, insurance companies or savings and loans; no real estate companiesor health care companies; not-for-profit companies, and governmental entities.

• If you choose a company that is diversified across industry segments the identification of a competitor or industry benchmark will be more challenging but it does offer an opportunity to evaluate how those segments contribute to performance or how they may mask comparisons across peers.

• Select a company that has operated at a profit, rather than a loss, in recent years.

Scope of Analysis:

The following topic outlines provide some notes on the content appropriate to include for a comprehensive assessment of each topic. In addition:

• Use relevant class periods to explore issues that arise as you prepare your analysis. The themes covered will also be seen in some of the cases discussed and developed over the term. There will be plenty of opportunity to raise questions.

• Draft your approach to each topic after the associated class on the topic. Ask questions during class to broaden your understanding of how concepts fit, or might apply differently across companies.

Topic 1: Financial Context, Risk & Performance Assessment (aka Financial Health)

This is perhaps the most crucial, and yet difficult topic because it requires you to pull together information that relies on core concepts, quantitative data & analysis, and a large dose of interpretative judgment. The idea is to have a solid understanding of the company and the industry it operates within so you can assess how the business environment will influence the company in the coming years. It is a forward looking assessment that doesn’t assume the past and future will be the same. Think about what can be different.

Company Selection

Business environment. Start with an overview of the company and the industry in which it operates. This should not be a description culled from company reports but a thoughtful assessment of the company business model, industry dynamics, competitive position and industry condition. This requires expanding your research efforts and collecting data from the financial press, relevant investor-related websites, and the PSU Library databases ( http://guides.library.pdx.edu/acctfin and/or employ the help of Kerry Wu, the Business Librarian). Note this requires more research than simply reading the ‘risk’ section in a 10k report. Consider: What is the outlook for the industry? For key factors in the industry (ie technology?) How do these translate to your firm level analysis? For example, you should consider the role of the company in the industry, (e.g., is it a giant, a niche player, etc.), the environment faced by the firm (e.g., is the industry growing, is it in decline, are there lots of competitors, is the industry regulated, etc.) . What conclusion(s) do
you draw about the potential future success of this industry and the company’s ability to sustain a competitive advantage?

Financial Forecast & Outlook: Based on the historical performance and existing trends, develop an opinion about what the future holds for the firm. What factors will driver firm success given the industry outlook and its competitive position? How are you defining ‘success’? What risks may the firm encounter over this future time period? Provide some specific points of evidence as support. What do you conclude about your company’s future position & outlook relative to its peers? Draw from the Historical time series & cross sectional performance analysis of your accounting project and use that data, in conjunction with the business environment and outlook, to draw conclusions about thecompany, its competitive position, and the industry in the future. What do you think will be different? Why? You need to interpret what the ratios imply about the company's performance. When ratios have changed significantly from one year to the next, you need to consider the cause of the change. If ratios differ significantly between the chosen firm and the industry or competitor benchmark, you should think about reasons for the differences. The focus of your analysis should be an interpretation of these results in the context of the company and the industry in which it operates.

In terms of organization, analysts often categorize ratios into broad categories such as profitability, growth, financial leverage, etc. That type of format can be useful in drawing and communicating your insights around each category. Don’t present all ratios you can possibly calculate – that is not appropriate nor is presenting 3 types of very similar ratios (ie debt/equity, debt/total debt, debt/lt debt). Be selective. Seek to add insight across core aspects of business operations, and relate back to finance concepts, where relevant. At a minimum, include a DuPont breakdown of ROE and historical sustainable growth analysis across time, and across a set of peers.

Topic 2: Risk

Finance uses the ‘risk term’ in many different ways. For your company, identify the key risk influences as it relates to the operating cash flows of the company. Relate to how these risk influences might translate to project or firm risk, the ability to carry debt successfully, and long run viability. For example, risk drivers might be related to high fixed operating costs, exposure to specialized commodities in the manufacturing process, exposure to Chinese economy and so forth. Include a qualitative assessment (sources, reasoning, your assessment of magnitude of the impact) and quantitative (sensitivity analysis, scenario analysis on operating cash flows under different assumptions regarding changes in the inputs you identify at risk). Be creative in this evaluation. At a minimum, consider the risk concepts noted throughout the term and include a comparison to its industry and/or peers. Include consideration of, and supporting metrics, for:

• Forecasting risk: Based on your assessment of the business environment, operating factors, and competitive position, what factors present the most risk when forecasting? When considering valuation implications? How does this analysis affect your value and debt capacity conclusions?

• Business risk: how much business risk is inherent in the industry? The company? What measures are you using to evaluate risk? Which factors are the most important? Explain your measures of business risk and your reasoning.

• Financial risk: how much financial risk is inherent in the firm? Measures? Reasoning?

• Market risk: how much systematic market risk is inherent in the company? Measures? Reasoning?