Deltic Timber Corporation Credit Analysis - Research Paper Example

?DELTIC TIMBER CORPORATION CREDIT ANALYSIS Executive Summary For the past five years, Deltic Timber Corporation (DEC) has not been able to maintain astatic growth trend. This is because even though the company continues to record profits for most of the years, this has been characterised by inconsistent growth margins, where there are falls in profit margins in-between the years. In line with this, it is recommended for the company to take up proactive strategic management options that will push its fortunes higher, especially when it comes to dealings with competitors. Currently, the company finds itself in a business environment where talks of monopoly are far from the argument. Due to this, the greatest hindrance faced by the company has been found to be that of the creation of a competitive advantage. Using a strategic management option that will make the company the focus of customers is thus the saving path for the company in years to come. Indicative with the ratios of the company given in the paper, it would be realised that the company continue to have high debt financing, which creates a decline for profit utilisation. This means that even though revenues are high, these are hardly translated into profits because of higher debts and other expenses. 1.0 Organizational Overview Listed on the New York Stock Excahnge, Deltic Timber Corporation engages in forestry industry where its major activities include the ownership and management of timberland. The specialisation that the company gives to this venture has resulted in the useful management of 445,800 acres of timberland over the past years. As a means of gaining diversification in its core business operation, which is the ownership and management of timberland, the company also owns two sawmills and is actively involved in real estate1. This said diversification has been the main source of financial capitalisation for the company because it has always been offered the opportunity of internally funding the running of its parent operations using revenues from diversified business. Currently, the company is headquartered in El Dorado, Arkansas. The market segment of the company has largely been focused on Arkansas and north Louisiana with very limited external and international markets. This situation comes with its own advantages and disadvantages for the company but the company has largely tried to live within its means of operations. This report is thus focused on critiquing the current credit situation of the company and offer recommendations. 2.0 Corporate Segment Deltic Timber Corporation’s corporate segment is reflected in its total asset as represented in the graph below. Generally, there are four segments that the company emphasises on. These are manufacturing segment, which takes 9% of total asset, corporate business, which is responsible for 7% of total asset, real estate, which accounts for 17% of the total asset, and woodlands, which take the highest portion of 68% of total revenue2. It is important to establish that the percentage gain of total assets as given above is not a direct reflection of the percentage of focus or corporate segment that the company gives to the various segment. Rather, the figures given above are a result of the contributions of gains that the various segments make to the company’s total asset. For instance in the 2012 Annual Report of the company, it was established that even though manufacturing is responsible for 9% of total assets, the company actually gives higher corporate segmentation focus to that segment than it gives to real estate, which earns the company 17% of its total assets. 3.0 SWOT Analysis 3.1 Strengths The company has an effective internally generated funding policy that is motivated by the fact that there are diversifying businesses that are managed under the franchise of Deltic Timber Corporation. The company has kept a very steady rise in revenues and operating incomes, making it have a very strong competitive engagement with its key competitions. 3.2 Weaknesses The company lacks global competitiveness as its market segment is largely limited to Arkansas and north Louisiana. In line with the corporate segments of the company, which focuses on four major segments, the company can be said to have a misplaced priority for some of the segment, which makes it impossible to maximise profits. For example, even though the company attempts to give much focus to manufacturing and not as much attention to real estate, real estate contributes more in terms of total asset and income than manufacturing. 3.3 Opportunities There is major opportunity in the use of technological platforms to expand the current market reach of the company. This can be done through the use of electronic commerce, which will give the company an outright global representation. The company has an opportunity of building on its current brand equity in Arkansas and north Louisiana, and as reflected on the New York Stock Exchange to embark on massive global expansion onto other stock exchanges such as the London Stock Exchange. 3.4 Threats The woodland ownership and management is the company’s number one source of revenue. Meanwhile, there continues to be global advocacy against the felling of trees, which affects the number of logging the company can undertake in a year. The relevance of paper, which is the company’s major production material is diminishing by the years due to the dependence on computer softcopy. 4.0 Porters Five Forces From the diagram below, it would be noted that the essence of analysing the Porters Five Forces is to critique the company’s readiness to face industry rivalry by marshalling forces from potential entrants, suppliers, buyers, and substitutes. Source: Notes Desk (2013)3 4.1 Threat of new entrants Over the past 10 years, the number of new entrants into the woodland industry has been diminishing by the years4. This might be due to the focus that most investors and new entrants are giving to the information communication and technology industry. With the brand equity that Deltic has therefore, new entrants are not expected to pose any threat to the company. 4.2 Threat of substitute products or services The influence of plastic and softcopies in replacing furniture and paper respectively comes as a major threat of substitute product for Deltic Timber Corporation. The fate of the company in terms of substitute products is worsened by global campaign for the greening of the earth in protection against global warming. 4.3 Bargaining power of customers (buyers) As far as the real estate and housing industries are concerned, it would be noticed that the pricing of products and services is highly driven by the industry rather than customers. This is because most of the products involved in this sector are considered to be inelastic. This means that whether prices go up or down, there will continue to be demand from consumers5. This means that there is no threat of bargaining power of customers for Deltic. 4.4 Bargaining power of suppliers As far as wood as a raw material to most of its manufacturing products and real estate is concerned, Deltic can be identified to depend very largely on its own supplies instead of depending on third party suppliers. This situation takes the bargaining power away from external suppliers, meaning that the company is in position to saving so much in terms of supply expense. 4.5 Intensity of competitive rivalry Several competitors can be identified for the industry in which Deltic Timber Corporation finds itself and operates. Most of these competitors have comparatively higher market shares than Deltic due to their global representation. There is therefore very intense competitive rivalry for the company. 5.0 Strategy 5.1 Corporate Level Strategy At the corporate level, there are two major strategies that the company seeks to emphasise. The first of this has to do with the need to expand into the Europe market with particular emphasis on London. This strategy has been necessitated due to the impact that the company’s competitors in Europe are currently making in that market. Currently, the trade liberalisation that exists in most European countries makes business growth in that part of the world very easier6. This makes the company’s competitors who have representation in Europe have a very strong market share over Deltic. Secondly, there is a corporate level strategy that is aimed at revitalising the diversification policy of the corporation, noting that the diversity has been a major source of revenue creation for the company in the past decade. Even though the woodland segment of the company continues to command the highest share of the total assets of the company, eliminating the contributions made from the other segments would push the company’s revenue into an outright deficit7. It is in line with this that the 2012 Annual Report of the company seeks to add two additional segments focused on the on the pulp market and rubber manufacturing. 5.2 Business Level Strategy At the business level, Deltic Timber Corporate does not find itself having problems with cost of production, leading to reduced prices of products and services. To this end, selecting the cost leadership strategic option will not yield any new and viable strategic competitiveness for the company. As a result, the differentiation strategic option is preferred for the company’s business level strategy. This strategic option will require the company to give emphasis and focus to be need to producing products and services that are different from what their competitors produce but maintaining market average cost8. This need for this business level strategy is generally because of the consumer behavioural shift that is being experienced from cost consciousness to quality and differentiation consciousness9. Today, when customers make purchases, their focus is on the need for them to have value for money by ensuring that the products and services they receive are of the highest quality. Another merit of the differentiation strategic option to Deltic Timber Corporation is that it will help the company to gain competitive advantage over its competitors who are already using cost differentiation because of their market share. 6.0 Financials 6.1 Financial Statement Analysis Source: Deltic Timber Corporation (2013)10 Emphasising on the trend of financial indicators, there are a number conclusions that can be made. In the first place, the company does not have a means of commanding a steady or even dynamic flow of its financial trending. To this effect, there continues to be rises and falls in its major financial indicators such as net sales and net income. For example from 2009 to 2012, in between each of the years, there continued to be no stable trend of growth. This could be attributed to an absence of sustainable financial policy for the company. As at now, it can be speculated that the company is engaged in a trial and error system of financial policy management that takes the control of financial performance away from the predictive hands of the company to the market flow. Another situation that is seen is that the company’s capital expenditure is almost the same as it operating income for most of the years. Due to this, even there are higher revenues for most of the years. These have not translated to higher net incomes, even though there are no losses per se. Below is a comparative analysis between the operating income of the company and its capital expenditure for the periods given in the table. From the graph above, it can be said that it is a very disturbing situation that for most of the years given 2009, 2011 and 2012, the capital expenditure is higher than the operating income of the company. Clearly, in the absence of other means of diversification revenue injection, the higher capital expenditure of the company would have made the company run at losses for most of the years. 6.2 Income Statement Analysis There are three key income indicators as given with the series of graphs below. These are net sales, net income and total assets, all in million dollars. Source: Deltic Timber Corporation From the representations of income statements above, it would be deduced that the company has made much strives and successes with its total assets. This is because apart from the period from 2009 to 2010 where there was a drop in total assets, there continues to be steady and rising growth in the company’s total assets. This situation is clearly attributable to the diversification that is practiced by the company in four major different areas. The company also can be said to have a track record with very high net sales, even though the numbers continue to fluctuate by the years. Yet again, this can be attributable to the fact that the company has several diversified areas where it commands its revenues from. It is however a very disturbing situation that for almost all the years, the company has not been able to turn even a quarter of its net sales into net income. 6.3 Ratio Analysis 12 months Dec-31-2007 12 months Dec-31-2008 12 months Dec-31-2009 12 months Dec-31-2010 12 months Dec-31-2011 LTM 12 months Sep-30-2012 Liquidity Current ratio 1.23 to 1 1.34 to 1 1.41 to 1 1.16 to 1 1.28 to 1 1.43 to 1 Quick ratio 2.5x 3.6x 4.5x 3.9x 3.7x 5.4x Leverage Debt to Equity .322 to 1 .356 to 1 .422 to 1 .285 to 1 .282 to 1 .271 to 1 Long Term Debt 65,833 75,833 91,222 65,611 64,000 $ 63,000 Profitability Return on Equity % (27.3%) (12.4%) (6.6%) (21.3%) 13.2% 32.3% The ratio analysis has been focused on liquidity, leverage and profitability. Clearly there are values and ratio flows that show a very potent ability for the company to effectively finance its debts, especially long term debts. This is because the debt to equity is of relatively lower values, with none of the years having a ratio that crosses the half mark of 0.5 to 1. Meanwhile, the long term debts of the company, in relation to other financial indicators that have been given earlier such as operating income and net income are very low. This means that the company is in a position to actively financing its debts off to ensure that its capital expenditure is lowered to create chance to pushing the profitability of the company higher11. 7.0 Corporate Forecast Based on the various financial flows and trends that have been given, an attempt to forecast the future financial pattern of the company will be very difficult. This is because for most of the variable of financial indicators, the company records undulating trends of flow. However, in terms of net sales, there can be the guarantee that into the next five years, the company will continue to see rises in net sales. The reason for this forecast is in the strategies that the company currently has in place to expand its market share and global representation. The same trend of forecast can be made for the company’s total asset. This is because these two indicators continue to record steady rises in their values over the past five years. It is expected that in the next five years, the company’s debt will come down further. This is because most of the long term debts are expected to be due within this period12. As the company finances these debts however, it is expected that the company’s capital expenditure will continue to go up. 8.0 Recommendations Based on the weaknesses and threats of the company, there are three major recommendations made for the company, going into the future: 1. The company must have more diversification sectors whiles giving more focus to the real estate sector 2. The company must rigorously make use of its existing brand equity on the New York Stock exchange to embark on massive expansion in Europe. 3. It is recommended for the company to reduce its internal spending so as to ensure that the capital expenditure of the company comes down so that the company can turn its higher sales into income. References Anderson, K. and Terp, A. (2011), Risk Management, Andersen T.J. (ed.), Perspectives on Strategic Risk Management: 27-46. Denmark: Copenhagen Business School Press Brymman, A. and Bell, E. (2013), Business research strategies, Business research methods, second edition: 3-37. United States: Oxford University Press Cohen, L., Manion, L., Morrison, K., (2013), Quantitative data analysis, Research methods in education (ed.): 501-508. New York: Routledge Rolland, H. (2012), Using IT to drive effective risk management. Texas: The Risk and Insurance Management Society, Inc. (RIMS). Zwikael, O. (2012), “Top management involvement in project management A cross country study of the software industry”, International Journal of Managing Projects in Business, Vol 1(4), pp.498-511 Read More