Schindler Holding AG - Case Study Example

Schindler Holding Ltd Schindler Holding AG Company Profile Schindler Holding AG was established in the year 1874 with its head office in Switzerland. The company is private Swiss holding company which has its business lines in the production, installation and maintenance of escalators, elevators and moving walks. The company has achieved high growth over the years through its global operations in almost 100 countries in six continents employing 43,000 employees and on an average moving 900 million per day (Schindler, 2009). The company's core business is in two main divisions Elevators & Escalators and ALSO. The Elevators & Escalators division manufacturers a whole range of elevators and escalators for different applications and various passenger, commercial and freight purposes. The group also has a specialized value driven service provider as Schindler Marine which has been involved in providing consultancy services and mobility solutions for ships since 1980s. It is based in Italy and also has operations in Miami, Florida. Its consulting activities and customized solutions cover all stages from planning and designing vessels to installation of escalators and elevators. Furthermore, this company also provides repairing, maintenance and modernization services to its valuable clients which include major cruise liners mainly operating in Europe (Schindler, 2008). ALSO Holding AG (ALSO) is the company's subsidiary which provides services in information and communications and produces consumer electronics for both wholesale and logistics sectors. ALSO is operating in different European countries and under a different name. The company faces strong competition from companies such as KONE (Finland), Otis Elevator (Farmington, CT) and ThyssenKrupp Elevator (Germany) (Hoovers 2009). In addition to these there is competition from numerous Asian companies based in Japan and China. Strengths In this section Schindler Holding AG and its products and services are assessed for their strengths which make the group a successful one and its stock an attractive buying option. The company has a strong brand which is recognised and accepted by customers worldwide. The company has a global presence through 1,000 representative offices and subsidiaries operating in different countries which make it well organized group with conviction ensured by the head office. Three major strengths of the company have been identified which are reliability, mobility and innovation leader. The reliability of the company has been mainly driven from the quality of its products and services. The company has a team of technicians and engineers who are involved in the process of design newer technologies and products which cater to a large number of customers in different sectors. These products are designed in such a way that customers and general public can have a sense of safety. The company has issued its corporate citizenship report which is aimed at providing safety precautions to millions of customers who use Schindler manufactured elevators and escalators. The company has implemented e-monitoring diagnostic tools to assists in trouble shooting. This allows companies technicians to respond to customers' problems in a short period of time. Employees of the company are also its strength involved in development of technology The company's operations are spread out globally and well integrated with its head office in Switzerland. The company is operating in almost 100 countries across 6 continents and has been successfully able to compete against its competitors to generate high value sales. This could be observed from the following graph which clearly indicates the geographical dispersion of sales of both divisions of the company. From this it can be seen that 79% of ALSO's sales are from company's contracts outside Switzerland. Similar its elevator and escalator division makes most of its sales in EU markets, North America and Asia. In this way the company has been able to mitigate risks of operating in a single country or market. Figure: Geographical Distribution of Sales Division-wise (Schindler 2009) The company has contracted with big names in construction, cruise line and commercial markets. The company has been able to place itself strongly amongst its competitors by delivering highest levels of quality, after sale service and regular improvement which helps it maintain a closer position with its customers. The company has maintained highest levels of quality in its products and services which is highly appreciated by both its existing and potential customers. The company has expanded into major markets outside Europe. These markets include America, Middle East and Asia Pacific allowed the company to access critical masses and reduce its distribution risks. The company has also carried out various structural changes which allowed the company to curtail its costs and non-profitable operations. The result of this organizational restructuring into much flatter set up allowed the company to achieve greater effectiveness and focus on providing superior technological solutions to its customers worldwide (Schindler 1999). The strengths of the company may include the diversification of the business. From being a manufacturer to service provider the company has managed to achieve and sustain higher market presence and also to mitigate concentration risks. The company moved to IT service providing sector by taking over ALSO which offered the company second line of business that has great potential. The company has been making systematic investment into improving technologies offered to its customers which surely ensures its well being in the years to come (Ebikon 1999). The company's financial position is quite strong which has led to the company being awarded high rank of BAA1 by Wright Quality Rating based on its last 3 years reported financial reports. This ranking is elaborated as Liquidity (B - Excellent), Financial Strength (A - Outstanding), Profitability (A - Outstanding) (CorporateInformation 2009). This is further analysed in the next section which involves a financial statement analysis of the company's reported financials for the last five years. The company has been innovative in both its products and services. The company has also implemented innovative solutions by carrying out extensive research and development in both divisions of elevator & escalation and ALSO. Weaknesses The company has its main business lines in manufacturing and selling elevators for commercial buildings which has been slowing down because of the current economic crisis and ailing construction industry. The outcome of such conditions in the market is declining revenue for the company. Net profit of the company felt down by nearly 6% to 156 million SFr in the first quarter of 2009. The company suffered heavily losses in financial products including arbitrage arrangements. The slow conditions in the global markets are likely to continue in 2009 which is surely going to affect company's revenues and profits. Furthermore, structuring costs in regards to the current financial crisis is likely to cost 100 million SFr to the company (Reuters, 2009). The company's dependence of steel from sources outside the host country is likely to affect company's pricing strategy for its products. The company had recently experienced price hikes in steel which made the company enter into arbitrage however that did not solve the problem in fact it caused the company further problems. Due to immense competition from manufacturers of elevators and escalators based in regions characterized by lower input costs the company is likely to face greater challenges to expand into such markets. These markets include China and India which have recently experienced high growth rates in construction have their own local industry quiet strong which seeks innovation and new products that is surely going to impose threat for the company. The company's inability to take advantage of such low cost stations could be considered as its weakness. The company faces market risks in terms of the interest rate fluctuations and translation of earnings made in foreign markets such as US is likely to be written down because of the weakening US Dollar against other currencies. Furthermore, weak sentiments in the stock markets are likely to create share prices shocks which could affect shareholders' invested capital drastically (Schindler 2008). Ratio Analysis Financial statements of Schindler Holding AG are gathered for a period of 2004-2008 and the following ratio analysis has been carried out by deriving values for different important financial ratios under three categories of Liquidity, Solvency and Profitability Ratios. Ratio Analysis Year ended 2004 Year ended 2005 Year ended 2006 Year ended 2007 Year ended 2008 ' ' ' ' ' ' Liquidity Ratio ' ' ' ' ' ' ' ' ' ' ' Current ratio 1.45 1.30 1.31 1.29 1.33 Quick Ratio 1.31 1.16 1.10 1.08 1.17 Receivables Turnover Ratio 6.46 5.70 5.50 7.16 8.18 Average Collection Period (Average Age of Receivables) 57 64 66 51 45 Inventory Turnover Ratio 10.24 8.82 6.95 9.34 12.63 Days in Inventory (Average Age of Inventory) 36 41 53 39 29 ' ' ' ' ' ' Solvency Ratios ' ' ' ' ' ' ' ' ' ' ' Debt-to-Total Assets ratio 71.98% 68.84% 70.08% 70.68% 70.28% Times Interest Earned (Interest Coverage) ratio 7.34 6.89 8.34 7.83 7.06 Cash Debt Coverage ratio 11.27% 8.33% 9.34% 11.89% 22% Equity Ratio 28.00% 31.20% 29.90% 29.30% 29.70% ' ' ' ' ' ' Profitability Ratios ' ' ' ' ' ' ' ' ' ' ' Gross Profit Rate 8.10% 8.50% 7.60% 6.90% 7.30% Profit Margin Ratio 4.00% 4.50% 4.60% 2.00% 4.50% Return on Equity (ROE) 22.01% 21.27% 23.47% 13.24% 31.42% Return-on-Assets (ROA) 6.17% 6.63% 7.02% 3.88% 9.34% Earnings per Share (CHF) 24.94 30.53 3.96 2.08 5.15 P/E Ratio 6.26 Payout ratio 28.40% 29.80% 33.30% 36.43% 36.60% Table: Financial Statement Analysis Interpretation The above financial ratio analysis brings important insights into company's performance over a period of five years. Liquidity ratios evaluate company's ability to meet it current liabilities and operate efficiently. Both current ratio and quick ratio of the company have remained above 1 in the period from 2004 to 2008 which suggests that the company is able to easily pay off its current liabilities from its current assets if they fall due at any time. The company has shown improvement in its receivable collections and the average collection period has reduced from 57 days in 2004 to only 45 days in 2008. Furthermore, inventory turnover ratio has also strengthen where average age of inventory has reduced from 36 days in 2004 to 29 days in 2008 which implies that the company has improved its operational efficiency and convert its inventory into sales much more quickly. Solvency ratios which ascertain company's ability to meet it long term obligations suggest that the company is highly leveraged with debt to total assets ratio hover around and above 70% throughout 5 years period which also implied lower equity ratio of around 30%. The company is generating sufficient income before interest and tax to meet its interest obligations resulting in high interest coverage for this period. Operating cash flow to total debt ratio is low which suggests that the company's has high debt obligations and is not generating enough cash from its operations. Upon examination of profitability ratios it is clear that the company operates at lower profit margins of just 4.50% in 2008. The ROE is healthy i.e. 31.42% in 2008 and investors can surely expect similar high returns on their investments as the company's recent results are reasonably good. However, EPS has been declining significantly over the period of 5 years mainly due to tougher competition, high interest payments and shrinking markets due to the poor economic conditions globally. P/E ratio could be an important indicator of shareholders expectations. A low P/E multiple of 6.26 suggests that the investor is only willing to pay CHF 6.26 for CHF 1 of company's income. Dividend Theories In order to assist the investor with the decision based on the expected dividends from investment in the company this report entails three different dividend policies as follows: Dividend Irrelevance Theory This suggests that the dividend policy of a company has no relevance to the stock price or the cost of capital. It is determined by the company's ability of generating income and business risks and therefore does not depend on how company's income is divided between dividends and retained earnings and has no impact on the required cost of equity (Brigham and Ehrhardt 2008). Tax Preference Theory This suggests that the investor's decision to hold a stock is affected by the tax treatment of dividends received. Most investors prefer to have lower dividends payout which could be taxed at higher rates and are more interested in seeking capital gains which are taxed at comparatively lower tax rates (Brigham and Ehrhardt 2008). Bird in the Hand Theory This theory argues against irrelevance theory and it suggests that dividend payout has affect on the cost of equity Ks. Ks reduces as the dividend payout increases as investors are faced with uncertainty regarding the capital gains expected from their investment in stocks. Furthermore, dividends received are likely to be reinvested in stocks therefore investors seek out higher payouts (Brigham and Ehrhardt 2008). Dividend Payout Trend Analysis Schindler Holding AG has a healthy dividend payout which has improved from 28.40% in 2004 to 36.60% in 2008. Using Trend function given as Trend (known_y's, [known_x's], [new_x's], constant) in MS Excel estimations of future dividend payouts are made for next four years from 2009 to 2012. The Trend ( ) function returns values along a linear trend which is based on a straight line using the method of least squares. Year Dividend Payout 2004 28.40% 2005 29.80% 2006 33.30% 2007 36.43% 2008 36.60% 2009 39.82% 2010 42.12% 2011 44.42% 2012 46.72% Table: Estimations of Future Dividend Payout From the above table it is expected that the dividend payout of the company is likely to improve over the next four years from 39.82% in 2009 to 46.72% in 2012. The company has communicated a dividend policy that is earnings related and is payout is between 35%-45% of the consolidated net income excluding minority interest (Schindler 2009). Also the company's earnings have remained substantial in the half ending June 2009 despite of the economic slowdown and difficult business conditions prevailing in the market. However, negative change can be observed in different elements of financial statements as compared to half ending June 2008 (Schindler 2009). Recommendation From the financial statement analysis and dividend payout trend analysis it is suggested that Schindler Holding Group is likely to hold its strong position in the market and is likely to continue its expansion in overseas market and intensify in the local European markets. Although the company has experienced declining profits in the first quarter of 2009 the company's has sustain greater shocks of the slowing down economies around the globe. The company is operating at low profit margins and still offers high return on equity which is further supported by high dividend payouts in the last few years. This trend is estimated to continue in the next few years. As the financial and economic conditions across major markets of the world it is expected that the company will be able to post much higher financials due to its technological innovations and high service standards. In the end it is recommended through this report that investment in Schindler Holding Group AG stocks is a feasible proposition keeping in a long term and conservative view of investment as higher returns on investment are expected and less volatility to changes in the market conditions. List of References Brigham, E. F. and Ehrhardt, M. C. (2008). Financial Management: Theory and Practice. Mason: Thomson South-Western. CorporateInformation. (2009). Schindler Holding AG. [online] Available from CorporateInformation: [accessed on 18 November 2009] Schindler. (2009). Company Factsheet. [online] Available from Schindler: [accessed on 20 Oct 2009] Schindler. (2009). Dividend Policy and Payout Ratio. [online] Available from.Schindler Holding AG: [accessed on 18 November 2009] Schindler. (2008). Financial Statements and Corporate Governance 2008. Ebikon: Schindler Holding Group AG. Schindler. (2009). Interim Report as on 30 June 2009. Ebikon: Schindler Holding AG. Schindler. (2008). Schindler Marine 2008. Milan, Italy: Schindler Marine. Schindler. (1999). Success Through Flexibility, Creativity and Persistence. [online] Available from DocStoc: [accessed on 18 November 2009] Schindler. (2009). Welcome to Schindler Group. [online] Available from Schindler : [accessed on 20 Oct 2009] Read More