Business Valuation of Tesco - Research Paper Example

? Business Analysis Business Analysis Answer Tesco is among the major leading grocery merchandising and retailing stores. It is listed on FSE 100 as a public limited company. It ranks second as the largest profit yielding retailing company after Wal-Mart. Tesco Company has a direct competition from the companies including Wal-Mart, Sainsbury’s, and Carrefour. The analysis of the five year performance of Tesco depicts that the company has been yielding enormous profits over these last five years. The data further illustrates that the company achieved high profitability during 2010-2011 as a significant positive change has been observed in its profit margin in that period; whereas, during 2011-2012 the operational performance has declined to a great extent. There has been a number of reasons resulting in the declining performance of Tesco. In the recession time, when other competitors like Wal-Mart, Sainsbury’s, and Carrefour have been facing severe problems, Tesco has adopted strong strategic plans to cope with the financial crisis. In the years following the financial crisis period, the company has reported a declining profit, despite the fact that profits yielding from its operations were greater, but the consumers’ behavior remained ineffective. A tough competition among competitive companies led by low profit margin pricing and marketing activities has been observed during 2012-2013. Company has maintained strong policies and strategies to overcome obstacles (Miller, 2005). The analysis of the performance of Tesco shows that the competition has led the company to initiate steps to minimize its costs. It has enabled the company to increase its profit margin when consumers hesitate to spend. On the other hand, an effective and innovative platform in the operational side of the business has been observed (Naunheim, 2011). The company has created innovative marketing plans, management plans, and financial and operational plans to increase its performance. According to the data, the company has minimized its profit margin in order to increase its sales volume. A maximum reduction in prices and discounts on prices have been observed (Naunheim, 2011; Palepu, 2007). This strategy has induced consumers to buy more. As the consumer’s behavior model has changed in the recent years, this strategy of Tesco has regained the confidence of consumers and has increased its sales volume. Answer 2 The analysis of the five year financial information (see Table 1) depicts that the company’s stock price has been fluctuating with the changes under economic circumstances (Naunheim, 2011). Tesco’s stock price peaked during 2009-2010, whereas a gradual fall was observed in 2010-2011, but a major decline in stock prices was in 2012-2013 (Dinkhoff, 2009). According to the financial data, there has been a major decline in 2012. Amongst competitors in the retailing and grocery merchandising industry, Sainsbury’s stock value has been gradually increased during 2009-2011. By the end of 2011, the company’s stock peaked, and after 2011 a gradual decline in the Sainsbury’s stock prices has been observed (Dinkhoff, 2009). Sainsbury’s market price has not fluctuated like that of Tesco during 2011-2012. The financial information of Tesco reveals that the company had negative 11 percent earnings per share growth in 2012. On the contrary, Sainsbury’s had 6% earnings per share growth in 2012. It shows that both competitors had declining earnings during 2011-2012, but Sainsbury’s had a positive growth rate whereas Tesco had a negative earnings growth (Cheng-Few Lee, 2006). There has been about a 5 percent decline in Tesco’s EPS in the current year. This is a major turn down and can cause the company to face severe losses in the investing sector. The data depicts the dividends have been the same as the previous year. This shows that the company has not decreased the dividends in order to maintain confidence of shareholders (Andrew, 2011). On the other hand, an increase in the dividend rate of Sainsbury’s has been observed in the same period. The dividends of the company have increased from 15.1p to 16.1p in the current year. This can be an induced factor for investors, and Sainsbury’s may have more investments than Tesco in times to come (Brigham & Houston, 2009). Table 1 Financial Information on Sainsbury and Tesco   Sainsbury  Year 2008 2009 2010 2011 2012 Revenue ($) 17837 18911 19964 21102 22294 Earnings per share (EPS) 479 466 733 827 799 Price-Earnings Ratio (P/E) 19.6 21.2 23.9 26.5 28.1 Price-Earnings Growth Ratio 0.5 1.8 1.1 1.2 1.8 Earnings per share Growth 33% 8% 13% 11% 6% Dividend 12 13.2 14.2 15.1 16.1 Divided Yields 3.60% 4.20% 4.30% 4.30% 5.30% Tesco  Year 2008 2009 2010 2011 2012 Revenue ($) 53898 56910 60455 63916 64826 Earnings per share (EPS) 29.06 31.8 36.45 40.31 35.97 Price-Earnings Ratio (P/E) 11.5 13.2 11.1 7.9 10.3 Price-Earnings Growth Ratio 1.9 1.5 0.7 0.7 0 Earnings per share Growth 6% 9% 15% 11% -11% Dividend 11.96 13.05 14.46 14.76 14.76 Divided Yields 3.60% 3.10% 3.60% 4.60% 4.00% Answer 3 Tesco has several fixed bonds that have been offered from time to time. The analysis of the capital structure of the company depicts that the company has 41.9% debt and 58.1% equity and about 24.46% debt to assets ratio (Palepu, 2007). The analysis of the capital information of the company shows that it has maintained to pay off its liabilities and has increased its equity more than its debt. It has been reported that Tesco has a fixed income of about ?1.3 billion annually. Tesco offers bonds with maturities ranging from minimum nine months to maximum five years. There are various different types of bonds that are being offered by the company. Below you can see the list of Tesco bonds in table 2. Table 2 Tesco Bonds   providers interest period 3- year fixed term deposit Cater Allen 2% 3 years 18-month fixed rate bond Principality 1.99% 18 months 9-month fixed rate bond Principality 1.80% 9 months 2-year fixed term deposit Cater Allen 1.8 2 Years 5-year fixed rate bond Vanquis 2.56% 5 years 3-year fixed rate bond Vanquis 2.51% 3 years These bonds are being offered by different banks and financial institutions (Miller, 2005). Tesco’s bonds are being circulated by three major financial dealers: Cater Allen, Vanquis, and Principality. The maximum interest provided on the 5 year fixed rate bond is 2.56 percent (Miller, 2005). The interest rate of Tesco bonds range from 1.8 percent to 2.56 percent (Andrew, 2011). Tesco bonds have higher market values than other market bonds. It is because of the goodwill and performance of the company. References Andrew, G. A. (2011). Financial management: Principles and practice. New York: Freeload Press. Brigham, E.F. & Houston J. F. (2009). Fundamentals of financial management. Mason, OH: Cengage Learning. Cheng-Few Lee, A. C. (2006). Encyclopedia of finance. New York: Springer. Dinkhoff, M. (2009). Business valuation of Tesco: Calculation of different valuation methods and presentation of differences between them. Norderstedt: GRIN Verlag,. Miller, I. (2005). Managing for the long run: Lessons in competitive advantage from great family businesses. Boston: Harvard Business Press. Naunheim, V. (2011). Gaining competitive advantage. Strategies for an Internet company to succeed in an international market. Norderstedt: GRIN Verlag. Palepu, K. G. (2007). Business analysis and valuation. London: Cengage Learning. Read More