SABMiller Plc and Kingfisher Plc - Coursework Example

SABMiller Plc and Kingfisher Plc SABMILLER PLC Company profile SABMiller Plc (SAB.L) was founded in South Africa in 1895 and only acquired its present name through the purchase of the Milwaukee U.S.A. brewer in 2002. This was in the wake of a series of acquisitions of local breweries in Europe, Asia, and the United States. The company carries six of the world's top 50 beer brands; it is also a major bottler of Coca Cola products. With brewing and distribution operations in the world's six continents, SABMiller is the world's second biggest brewer. It is headquartered in Westminster, London, UK. The economy. A company with interests so geographically dispersed as SABMiller's is impacted by what happens in the global economy. Although regarded a non-cyclical industry, beer brewing has been affected by reduced overall demand for goods worldwide, including consumer goods, and SABMiller saw its turnover drop, albeit not very significantly, in 2009. According to the CBI Economic Forecast published in December 2009, there will be a a modest recovery of world economic activity in 2010, but the longer-term trend will not resume until 2011. For the UK, this marginal growth will be driven by continuing strong Government spending, a modest increase in exports, and some recovery of consumer spending. The UK Gross Domestic Product is forecast to grow by 2.2 percent this year, and 2.5 percent the year after that. Consumer spending growth will be hampered by high energy costs, unwillingness to borrow, and the need to save for future needs. The industry The company belongs to the non-cyclical consumer goods and services sector, and the beverages/brewers industry. (Reuters). According to Hoovers, industry demand is driven by consumer preferences for alcohol consumption as well as demographic trends. As is true for most consumer products, success often goes to large companies because of their effective sales operations, broad distribution networks, and economies of scale. The industry is capital intensive. The top competitors of SABMiller plc are, Diageo plc, Heineken NV., and Anheuser-Busch InBev. The latter replaced SABMiller as the world's biggest brewer after InBev acquired Anheuser-Busch for $52 billion in 2008. Company performance The company recorded a revenue level of US$18.7 billion in 2009 and a net income of US$2.16 billion compared to US$2.29 the year before. Sales in 2009 dropped 12.6 percent due to the global recession, but overall revenue has grown by an annual average of 10.5 percent over 5 years and 6.9 percent over three years. Earnings per share average 18.6 percent over five years and 6.13 for the last three years, a somewhat drastic drop due to the negative 7.08 percent fall in 2009. Net profit margin in 2009 was 10 percent, compared to just 2.5 percent for the industry, whereas the return on stockholders' equity was 11.4 percent. Shareholders receive regular dividends, and in that year this amounted to 38p, representing a payout ratio of 46 percent. In terms of financial strength, the company has a marginal current ratio of 0.72:1, compared to the industry's 0.90 :1, but a fair gearing ratio (debt to equity) of 0.63 to 1. where the industry average is 0.92:1. (Reuters). The Price/Earnings ratio is a high 31.5 : 1, which means that its stock is trading in the London Stock Exchange at 31.5 times earnings. This has, however, averaged 18:1 during the last five years. Compared to the industry, the company has been paying dividends, which have been growing at 14.1 percent compared to 8.73 percent for the industry. Its payout ratio has also averaged a high 63 percent compared to less than 10 percent for the industry. The company's beta coefficient is 1.18, which means that its stock slightly more volatile than the general market, - that is, any movement of the stock market index, whether up or down, is matched by an 18 percent more accentuated reaction by the company's stock price. Our regression using the FT All share for the adjusted prices during the past 3 years however showed that the actual beta is 1.39. The alpha (y-intercept) of 4.156 indicates that the stock has significantly outperformed the market (whre alpha = 0), which means equal performance between SABMiller and a designated market index. Shown below is the regression chart and the resulting equation. Fig. 1: The regression equation and beta If we invested a certain amount at 1679p per share on February 15, 2010 the share price would have grown to 1797p at the end of that month, to 1893p on March 15, and 1932p on March 21, 2010. This is a growth rate of 15.1 percent over a 1.5 month period -- an annualized growth rate of 121 percent. It is likely, however, that the pattern will not be sustained short term, so one should mix optimism with caution. We can perceive the comparative price performance of a stock graphically by showing them along with an index such as the FT All Share. Below is such a chart for SABMiller plc. relative to the FT All Share Index. The chart indicates that the company has performed nearly 100 percent better than the said Index over a period of one year. Fig. 2: Price and FT All Share Technical Analysis Technical analysis is employed by investors and speculators in order to time their entry and exit in the market. Using line charts, one is able to see in graphic terms how a company's share prices develops across a certain span of time. The most popular form of reading the charts is by putting in the moving averages, and Reuters and Yahoo finance provide interactive charts where we can click on buttons to command that such indicators are shown or overlaid. Technical analysts know scores of technical indicators that one can choose from in order to make wise timing decisions at anytime of the day. Two or more such indicators can be combined in order that by confirming on another, a more accurate decision is possible. We are going to show two such indicators: the Moving Average Convergence Divergence (MACD) and the Bollinger Bands. Below are the results for a one-year period. Fig. 3: Bollinger Bands and MACD on price, one-year data A narrow channel in the Bollinger Bands would tend to portend either a breakout or breakdown in prices. But this has to be confirmed by the MACD (shown below the main chart) which indicates a bullish trend spanning several months, broken only sometime in January 2010, followed by a reversal in early March, as the upward trend resumes. The MACD bars have to cross the zero line to confirm what the Bollinger Bands are saying. The shorter 3-month period below is probably more interesting. 3 month period. Bollinger Bands, MACD, FTSE100 http://uk.finance.yahoo.com/q/ta?s=SAB.L&t=3m&l=on&z=m&q=l&p=b&a=m26-12-9&c=^FTSE Fig. 4: Bollinger Bands and MACD on 3-month data This is a close-up view of SABMiller's charted prices and the technical indicators at work. If one could use a vertical cursor, the crossover at zero line would tell the investor that it is time to buy shares because the short-term trend is moving upwards. Conclusion and Recommendations Fundamentally, SABMiller plc is a sound company in a relatively stable industry. Although it is more volatile than the market as a whole (through its beta of more than 1), it has shown resiliency and robust growth particularly during the past three months. Its good dividend record makes it a good investment for investors who aim for steady cash income. As one of the constituents of the FT100, it is well established, and its global reach makes it a good investment for those who need stability through diversity of currencies and markets. The last three months of superior price performance is perhaps difficult to sustain, especially because its price-to-earnings ratio is already high. . However, if one thinks long term, the stock of SABMiller plc is a good buy. We would advise, however, that one wait for the proper technical signals before calling one's broker to buy the company's shares. SECURITY ANALYSIS: KINGFISHER PLC Company profile Kingfisher plc (KGF.L) is Europe's leading international home improvement retail group that sells products through a network of over 800 retail sites in eight countries, located mainly in the United Kingdom, Europe and Asia. It was founded in 1982 through a buyout of the British Woolworths chain. The company's do-it-yourself portfolio of retail improvement products are found in UK, Ireland, China, Poland, France, and Russia. It owns UK's largest direct and online supplier of tools to the trade, Screwfix, which has 150 branches. The Economy A company with interests widely dispersed internally such as Kingfisher plc is affected by what happens in the global economy. Being cyclical in nature, the company's products can suffer from the vagaries of aggregate demand for goods worldwide, although sales did not suffer in 2009. According to the CBI Economic Forecast published in December 2009, there will be a a modest recovery of world economic activity in 2010, but the longer-term trend will not resume until 2011. For the UK, this marginal growth will be driven by continuing strong Government spending, a modest increase in exports, and some recovery of consumer spending. The UK Gross Domestic Product is forecast to grow by 2.2 percent this year, and 2.5 percent the year after that. Consumer spending growth will be hampered by high energy costs, unwillingness to borrow, and the need to save for future needs. The Industry Kingfisher plc belongs to the cyclical consumer goods and services sector and to the retail -home improvement products and services industry (Reuters). According to Hoovers, demand in the industry is driven by residential real estate construction and renovation. Successful companies rely on their merchandising programmes and customer service. Large companies enjoy scale economies in purchasing and and possess an advantage in that they can offer more products. The principal competitors of Kingfisher plc are Focus (DIY) Limited, Homebase Limited, and Wolseley plc. Company performance The company generated a total revenue of $10.5 billion in 2009, slightly higher than that of the previous year's $10.0 billion. Net income after taxes was $385.0 million, or a net profit margin of 3.67 percent -- better than the industry's 1.1 percent. This yielded a return on shareholders' equity of 7.98, also better than than the industry average of 3.49 percent. In terms of financial strength, the current ratio of 0.99 is below that of the industry's 1.19, denoting a more risky position that needs to be corrected with an infusion of either equity (new capital or retained earnings) or long-term debt. Gearing or debt to equity of .31 is better than that of the industry which is .53 The Price/Earnings ratio is 14 -- compared to a low 5.57 in the industry. No data are recorded regarding the average ratio for the last five years. The company has been paying dividends, with a payout ratio of 33 percent, but dividend per share has been declining during the past 5 years. This is so despite the fact that the dividend rate for the industry has been rising at 11 per cent annually. The company's beta coefficient given by Reuters is 0.91, which means that it is less volatile than the general market, - that is, the stock does not move as much as the market during the down market or up market. Our regression using the FT All share for the adjusted prices during the past 3 shows a close similarity -- with a beta of 0.99. The alpha (y-intercept) of .4066 indicates that the stock has only slightly outperformed the market (an alpha of 0 means they are equal). Shown below is the regression chart and the resulting equation. Fig: Deriving the regression equation and the beta coefficient. If we invested a certain amount at 205.7p per share on February 15, 2010 the share price would have grown to 218.9p at the end of that month, rising almost imperceptibly to 220.20p on March 15, and slipping to 214.40p on March 31, 2010. This shows a low growth rate of 3.9 percent over a 45-day period, or an annualized rate of 31.2 percent. We can perceive the comparative price performance of a stock graphically by showing them along with an index such as the FT 100 Index (whose correlation with the FT All Share is extremely high) Below is such a chart for Kingfisher plc. relative to the Index. The chart indicates that the company has not performed well relative to the FTSE100. It confirms our observation about beta which was very close to 1, and the fact that the alpha was just slightly above zero. Fig. 2: Price data and the FTSE 100. Technical Analysis Investors and speculators use technical analysis in order to improve the timing of their entry and exit in the market. The line charts enable one to see graphically how a company's share price changes through time. The most popular form of reading the charts is through the moving averages. Reuters and Yahoo finance provide interactive charts where one can click on buttons to command that certain indicators are drawn. Technical analysts know scores of technical indicators that can be selected in order to make wise timing decisions at anytime. Two or more such indicators can be combined to confirm one another. Two chosen indicators -- the the Moving Average Convergence Divergence (MACD), which incorporates moving averages, and the Bollinger Bands -- will be used for our purposes. They are shown superimposed on the price chart below. Fig. 3: Bollinger bands and MACD on price lines, one year data A narrow channel in the Bollinger Bands would mean that either a breakout or breakdown in prices will soon occur. This will be confirmed by the MACD (shown below the main chart) which shows choppiness and lack of definite direction. A stock trader using technical analysis alone would find that in situations such as this, he/she can get whipsawed often and make more trades than necessary while accumulating losses. The shorter 3-month period below shows an interesting close up of part of the one-year chart. Fig. 4: Bollinger bands and MACD on price lines, 3-month data The days following February 24 may indicate to the reader that a breakout is about to occur when the Bollinger Bands start to widen whilst the MACD crosses the zero line. This is a definite buy signal which could be advantageous for the short-term trader. Conclusion and Recommendations One who expects dynamic profits will not be inclined to take a position on Kingfisher plc. It looks as lackluster as the the FT market index with its beta that approximates the index. Also, the price-to-earnings ratio indicates that there is not enough volatility for anyone who would like to gain by trading on the technical signals. A buy is not recommended. We would prefer an index fund because of diversification. Bibliography http://www.hoovers.com/company/Kingfisher_plc/sftyyi-1.html http://www.reuters.com/finance/stocks/financialHighlights?symbol=KGF.L http://www.reuters.com/finance/stocks/incomeStatement?stmtType=CAS&perType=ANN&symbol=KGF.L http://www.reuters.com/finance/stocks/analyst?symbol=KGF.L http://www.reuters.com/finance/stocks/chart?symbol=KGF.L Read More