Principlies of finance - Assignment Example

?Principle of finance Xtrata plc. Headquarter of Xtrata plc is in Zug, Switzerland and has operation in different nations. The main operation of Xtrata is as explorer of the copper, coal, nickel, zinc, platinum, gold, silver and also ferrochromium. Other operations are like development, marketing and supporting technologies related to the mining, mineral processing and metal extractions. Copper has 49% and coal has 28% contribution to the profit. Economic crisis was a hit for this company for a short period because of the strategic decision taken by board and also for the other macro economic factors related to the metals & minerals. Continuing in investment for the organic growth projects during the recession time and also in the post period in 2009 have helped to get targeted growth. Along with this the economic recovery in 2010 through promising higher GDP growth in the developing nations, fiscal stimulating packages, restocking and positive demand of the commodities in the late 2009 are the key forces of the basic materials sector, have impacted on companies top line and bottom line growth. This year coking coal and nickel have good production, while volume of copper, chrome and lead in concentration has increased by 50%from the last year. Operating profit is also increased by 75% from $4369 million last year to $7258 million this year. Other key fundamental micro factors are positive for choosing the company is expansion in portfolio through entering into iron ore business, expansion and commissioning new mines, continuing cost reduction and nearly $10 billion cash generation. Analyzing chart drawn below in comparison with the FTSE, it could be found that company has better return than the index in the period from the 4th Feb, 2011 to 1st April, 2011; and in the chart the company has uptrend prices which has broken the resistance of 1450 recently. Along with this analyzing the SWOT analysis of the Xtrata, I found that the company has threat in long term commodity demand but strength in financial performance are the good indicators to me to buy the stock for short term period.   Xtrata FTSE Return 0.703023 -0.54415 Rio Tinto plc. Rio Tinto plc is highly diversified company with operations in finding, mining and processing mineral resources. Rio Tinto produces aluminum, copper, gold, silver, diamond and other industrial minerals. Rio Tinto is engaged in all the continents; the head quarter is in London, United Kingdom. Rio Tinto’s business includes the mines, mills, refineries, refineries and research facilities. Company has 5 major product groups like aluminum, copper, diamonds, minerals, energy, iron ore, exploration and technology & innovation; and number of subsidiaries for availing facilities of economies of scale and cost structure. But iron ore is the main contributor to its earning with 73% dominance and copper has 18% contribution in the earning. Global financial crisis has affected Rio Tinto and created a challenge; but company is able to stabilize the situations with the proper strategic steps. This year company is able to manage a whopping increase in net earning from $4.9 billion to $14.3 billion. Basic materials sector is also witnessing demand for above average GDP growth of China, India and other emerging nations. Global economic situation is also helpful for the increasing demand in ores. Investors and fund mangers also investing in diamonds and minerals, which is another positive force for short to medium term to the Rio Tinto’s growth. Through the SWOT analysis of the Rio Tinto, I found that the company has cash risk, market volatility threat and technological challenges in near future but the competitive advantages and growth in medium term is good opportunity for the inventors. Apart from this fundamental analysis, I found that the Rio Tinto’s return is combatively better and impressive than other competitors in the same sector for medium term and at this moment the share value is in uptrend but has major resistance in 4800. Hence selling the stock at this moment before profit booking and rebounding back to trade zone is more profitable but repurchasing after few days for medium term is more prudent to me.   Rio Tinto FTSE Return -0.55436 -0.54415 HSBC plc HSBC has services from banking to financial products. Personal financial services under the HSBC group offer current account, personal account, loan, cards and payment services. Wealth management services take care of insurance, investment and financial products. It has existence in 87 countries for global banking, capital market and commercial banking facilities; it is headquartered in London, United Kingdom. Global financial crisis has affected a lot for global banking companies. This sector is not affected for in the emerging countries but considerably impacted on developed countries. HSBC has major revenue earning from developed countries hence most of the groups underlined have reflected bad performance in 2010. The major sector indicators are in still in bad condition. These indicators are like GDP, CPI, unemployment, government debt, interest rate etc. Those are mainly the reason of the demand for the different products of banks and financial services. From the chart below and comparing the share value of HSBC with the FTSE index, I found that I am right still in the decision for the short term period to keep sell in this stock. I sold this stock on 9th March at the 674gBP because the average value of 675gBP is the major resistance to break out. Recently the stock is plunged in to below 670gBP. Even the from SWOT analysis with threat in financial performance and weak sector indicators like increasing unemployment indicators and along with lower return than FTSE, it is prudent to keep in sell position for the medium term.   HSBC FTSE Return -3.97806 -0.54415 Tesco plc Tesco operates as the grocery retailer for foods, non food and others. The Headquarter of the Tesco is in Cheshunt, United Kingdom. Tesco’s service is spread from store format to telecom services, internet services, financial services, insurance services. Tesco’s operation is in United Kingdom, other European countries and also in Asian countries. Recently Tesco is venturing into the secondhand car business. This is profitable as the middleman will be curtailed down. In this service sector the demand is decreasing due to increasing grocery price inflation, VAT, fuel price, job security and government spending. This decrease in demand has also affected the sales growth in the overall sector. Tesco is also facing the steep competition in the market as the sector has oligopoly in nature. As a result the profit margin is also decreasing, hence the top line and bottom line growth both are in downturn situation for this retail grocery industry. But Tesco’s financial performance is better than the last year. Overall revenue growth has increased by 7% and earning per share is also increased by 10%. Tesco’s strategic steps and internal planning for the business is positive for the investors but overall market condition is not in favour of the growth. Hence fundamentally the return on investment for the inventors for this stock is not comparatively good. This has also supported by the short term technical analysis using last two months share value. The return for the Tesco is far less than the FTSE because of the decrease in investor’s confidence. From the SWOT analysis it is found that the threat in price rise, ebbs in demand is stronger than the microeconomic factors. Along with this the downward trend in stock price has broken the short term support. The decision on the sell for this stock on 8th March at the price of 400gBP was a prudent investment.   Tesco FTSE Return -2.63956 -0.54415 BT plc BT is headquartered in London, United Kingdom with communication services worldwide. Its market is segmented into four. One segment is for the networked IT services for corporate, domestic business and for governments. Another segment is retail business for the broad band, telephony and TV services for the domestic, small and medium sized business. Third segment is for wholesale business with value added services and the last segment for the connections of the providers. With this vastness in business, BT is profit making company for the last few decades. This sector has lack in healthy competition due to huge investment in spectrum purchase and network building. The demand in this industry is ever increasing but the government interventions, regulatory barriers and restrictions in operations in certain areas are important factors for the growth of the company. Technological drift from 3G to 4G and in other areas are key areas to increase the cost structure. Mergers and acquisitions to get competitive advantage over the competitors are very common tool in this industry. BT’s free cash flow and earning per share both have increased but the revenue income is decreased by 2%. The SWOT analysis of the BT is with threat in revenue growth but the strength in expenditure and cost reduction is positive indicator for the buy for long term period. Technical analysis using short term share price value is not supportive to this decision to buy at this moment as the formation of head and shoulder is in the chart; signifies the bearish mood in the investors. From the return analysis it can be inferred that may be the good return from the three past rallies can exhausted the interest of investors from this stock and would be side lined in future. Hence sell at this moment is prudent decision for the investor.   BT FTSE Return 0.186593 -0.54415 BG plc BG is natural a gas company, operating world wide. Company is involved in exploration, production and marketing also. The Headquarter of the company is in Reading, United Kingdom. Its LNG (liquefied natural gas) segment is flagship with production, re gasification and distribution through its own network. It has good competition in the oil and gas industry but the pioneering position in LNG segment. This segment has high risk and high expenditure in exploration. Demand is not functional rather cost structure and supplies to the customers through speed and time; and with lower loss are challenge in this sector. Hence technological up gradation, modification and research on exploration are main indicators of sustainability as well as the diversifications in growth segment through investment are key indicator of the growth in business. Total operating profit of BG is increased by 17%. Total reserves have also increased from 14494 to 16840 mmboe. The recession has affected BG but its strategic decision for the market development in BRIC nations has strengthened the growth in revenue. From SWOT analysis it could found that the company’s internal management is well planed for maintain sustainable growth. Along with fundamental analysis, this the short term return of the share value and uptrend chart is well supporting to the buy decision for the investor.   BG FTSE Return 3.516946 -0.54415 Conclusion Four sectors are selected here for the studies in six companies are oriented to basic materials, financials, services and technology sectors. These four sectors are very important to economic conditions like post financial crisis recovery, production demand, GDP growth of developing countries etc (Atrill & McLaney, 2006). In the basic materials sector, metals & minerals and oil & gas are important industries and related to Xtrata, Rio Tinto and BG. Xtrata and Rio Tinto both are under the metals and mineral industries but BG plc is in oil and gas industry. HSBC is in the banking industry under financial sector. Tesco is operating in the grocery industry, under the service sector where as my last pick is BT plc in the wireless communication industry, under the technology sector. So my portfolio of FTSE 500 included six companies are Xtrata, Rio Tinto, BG, HSBC, Tesco and BT; they are considered for the further study.   As per 4th April, 2011 share value Xtrata buy gain Rio Tinto buy gain HSBC sell gain Tesco sell gain BT sell gain BG buy gain Hence the investment decision to buy or sell is gain to the investors at this juncture for all the stocks. Only for Rio Tinto which needs to hold for medium term can return better result for the investors. References Atrill, P. & McLaney, E., 2006. Accounting and Finance for Non-Specialists. 5th edition. Harlow: Financial Times/Prentice Hall. Read More