The Stock Potential of Owens and Minor Inc - Essay Example

July 06, Equity Research Report This paper is an equity research report, intended to provide information to investing clients about future potential for stocks of a company to determine whether one should purchase or sell a stock. It is recommended that an investor should purchase a stock if the market price of the stock is below its fair price. If the market price of the stock is above its fair price, then it is recommended that the stock is sold to obtain profits. The firm whose stock potential is being analyzed is Owens & Minor Inc. Executive Summary: Owens & Minor Inc. Ticker: OMI Recommendation: Hold Price: $29.78 on 31.03.2010 Price target one year: $34.95 Highlights: A fortune 500 company headquartered in Richmond, Virginia. Wide distribution network throughout the United States. The provider of the broadest selection of branded products. Unique, superior products are offered through non competitive partnerships with leading manufacturers of health care products through cost effective product line labeled Medichoice, OM direct etc. Supplier assortment, community participation and sustainability are the guiding principles of the firm. Hospitals and Ambulatory surgery centers are the principal customers of the firm. Financial Summary: Market capitalization of $ 2.04 billion in 31.3.2010. The first quarter of 2010 saw an increase in the net income of the firm by 98% as compared to the previous year. Operating earnings in the firm increased by 23.3% as compared to the first quarter in the previous year 2009. Cash and cash equivalents as on 31.03.2010 was $ 146.4 million. A review of the firm’s earning growth rate indicates an average earning growth of 5.4% over the past ten years. Dividend yield of the stock of the firm as on 31.03.2010 was 2.1%. Qualitative analysis: Company profile and industry overview: Owens & Minor makes sure hospitals are organized for main surgeries. “Its services include logistics, supplier management; analytics inventory management, outsourced resource management, clinical supply management, and business process consulting” (Owens & Minor Inc (OMI: New York) Par. 1). A primary dispenser of surgical and medical supplies, the industry takes about 200,000 products from 1,200 producers. Products distributed by Owens & Minor contain surgical dressings, intravenous and endoscope products, syringes, needles, sterile procedure trays, gowns, sutures and gloves. Owens & Minor consumers are chiefly health systems and hospitals and the purchasing associations that serve them. It distributes products to about 4,400 health care contributors from above 50 distribution places from corner to corner the US. SWOT analysis: Strength: Owens & Minor offers a range of information investigation tools and consulting services and outsourced resource management. Weakness: In the recent times, their overall profits are down. Opportunities: The opportunities open to the Owens & Minor are measured in terms of its future development prospects. Threats: The company needs to evaluate prospective partners, vendors and suppliers. Porters 5 Competitive Forces: Porters 5 competitive forces consist of supplier power, threat of new entrants, and threat of substitutes, degree of revelry and buyer power of Owens & Minor. The healthcare supply chain expertise, joined with a continued responsibility to investing in information technologies and to bring a bounty of benefits to health provider customers and supplier partners alike. Threat of new entrants is a probability of reaction from existing competitors and barriers to entry of the Owens & Minor. It consists of economies of scale, product differentiation, capital requirements and governmental and legal barriers of the Owens & Minor. Major Owners: Table 1 shows the major owners of Owens & Minor. Financial Statements Analysis: Ratio Analysis: I. Short term solvency or liquidity ratios a) Current ratio: Current ratio is defined as ratio of current assets to current liabilities. It is computed as follows. Current Ratio= Current Assets/Current Liabilities b) Quick Ratio: Quick ratio forms the connection between quick assets by quick liabilities. Quick ratio= Current assets - inventory / Current liabilities. Interpretation: Table 2 shows the short term solvency or liquidity ratios. In 2009 Owens & Minor shows higher performance of current ratio and quick ratio. In 2009 and 2010 the company shows a comparatively lower performance in current ratio. II. long term solvency or financial leverage ratios: Financial leverage ratios are used to calculate long term solvency of the firm. It consists of Total debt ratio, debt equity ratio and equity multiplier. a) Total debt ratio-Total assets- total equity/ total assets. b) Debt equity ratio - Total debt/total equity. c) Equity multiplier- total assets/total equity. Interpretation: Table 3 shows the long term solvency or financial leverage ratios. In comparison of 2010 and 2009 total debt ratio, debt equity ratio and equity multiplier are high in 2009. This indicates that the current performance is low. III. Asset utilization ratio: The asset utilization ratio computes the overall income earned for the total assets a business owns. This ratio indicates the industry’s effectiveness in using its possessions. a) Inventory turnover=cost of goods sold/inventory. b) Day’s sales by inventory-365days/inventory turnover. c) Receivable turn over=sales/ Accounts receivable. d) Days sales in receivables= 365/ Receivable turn over. e) Capital intensity= total assets/sales. Interpretation: Table 4 shows the asset utilization ratio of Owens & Minor. The overall case Asset utilization ratio Owens & Minor shows higher performance in the year 2009. Capital intensively showed high in the year 2010. IV. Profitability ratio: Profitability ratios calculate the ability of the firm to make a sufficient go back on sales, invested capital and whole assets. It generally considered both the relation to sales or investment. a) Profit margin= net income/ sales b) Return on assets (ROA) = Net income/ total assets c) Return on equity (ROE) = net income/ total equity. Interpretation: Table 5 shows the profitability ratio. During the years 2009 to 2010, based on all profitability ratios, the trend shows that performance of the company remained bad. V. Market value ratio: a) Price earnings ratio= price per share/earnings per share. Interpretation: In comparison, to the year 2009, the price earnings ratio is high in 2010. So the growth of earnings is high. Earnings forecast and growth forecast: Table 7 shows EPS forecast. Owens & Minor’s sales revenue was 8,037,624 in 2009 and 7,243,237 in 2008. This change stands for a development of 9% in 2009 relative to 2008 sales. The normal past development is 9.95%. However, financial circumstances in 2010 stands probability of being subjected to recession, so it might create sense to change the forecasted development for 2010 lower at 6%. Risk and Pricing The economic recession has also greatly affected the stock movements and volume of trading in Owens & Minor Inc, while determining whether the stock should be purchased or sold. This analysis should be done in order to find whether the fair value is below or above the market value of the stock in order to make an equity decision. (Stock Chart par. 1). The free cash flow to equity is calculated by using the formula: Free cash flow to equity = cash flow from operations + net borrowing – capital expenditures = 242.92 million – 101.40 million – 14.6 million = 126.92 million The % of free cash flow to revenue is 1.3% in the year 2010. It is very difficult to ascertain a discount rate for a listed stock. The discount rate for a listed stock can be calculated by using the CAPM only. The discount rate calculation is a very difficult task and also the discount rate is quite uncertain because a small change in the discount rate causes a large change in value. The discount rate is calculated using the formula: rf + ( ? ? (rm - rf)) rf is the risk free rate which is 4.5%. rm is the expected return on the market which is 10.5% ? is the beta of the cash flows or security being valued which is 0.44 Discount rate = 7.14% Therefore fair value = 126.92 / 7.14 = 17.77 approx = $ 18 per share While the market value of the stock is close to 30 the fair value of the stock is only close to 20. Therefore, selling of the stock is the preferred decision rather than buying. But since the firm’s annual growth rate has been considerably good till the year 2009, therefore, the stocks of the firm have suffered because of the economic recession. So it is recommended to hold the stock at the moment to check the market. Considering the SWOT analysis, the dividends payment to shareholders, the price earnings ratio from the previous years and its brand image in the market and the firm’s annual growth rate over the past years the recommended decision at this point of time is to hold the stock and withdraw from making a purchase or sale decision of the Owens & Minor Inc. Appendix: Breakdown Percentage of Shares Held by 5% Owners and All Insider and: 2% Percentage of Shares Held by Mutual Fund &Institutional Owners: 91% Percentage of Float Held by Mutual Fund &Institutional Owners: 92% No of Institutions investment Shares: 221 Table 1 Major owner: Table2 short term solvency or liquidity ratios: Table 3 long term solvency or financial leverage ratio: Leverage Ratio 2009 2010 a)Total debt ratio 0.56 0.53 b)Debt equity ratio 0.27 0.24 c)Equity multiplier 977909 964521 Table 4 Asset utilization or turnover ratio: Table 5 profitability ratio Ratio 2009 2010 a)Price earnings ratio 1.03 1.52 Table 6 market value ratio: Table7 EPS forecast: Work Cited Owens & Minor Inc (OMI: New York). Boomberg Businessweek. n.d. Web. 06 July 2011. Stock Chart. Owens & Minor. 2011. Web. 06 July 2011. < http://phx.corporate- ir.net/phoenix.zhtml?c=88719&p=irol-stockChart> Read More