Introduction to Invest Portfolio - Coursework Example

INTRODUCTION TO FINANCE By of the of the School PART Spreadsheet showingthe investments i have chosen INVEST PORTFOLIO OF 10 COMPANIES LISTED ON THE LONDON STOCK EXCHANGE           STOCKS CLOSING SHARE PRICE NO. OF SHARES INVESTMENT VALUE BETA BBA AVIATION PLC £333.90 25 8,347.50 1.15 ASTRAZENECA PLC £71.43 138 9,857.34 0.88 PERSIMMON PLC £1,410.00 11 15,510 1.54 NETPLAY TV PLC £7.75 973 7,540.75 0.0783 WOLSELEY PLC £3216.32 4 12,865.28 1.27 RYANAIR HOLDINGS £7.40 563 4,166.20 0.6144 FINSBURY FOOD GROUP £63.00 142 8946 0.6217 COMPASS GROUP £978.50 14 13,966 0.7061 INMARSAT £678.00 13 8814 0.5884 SEVERN TRENT PLC £1,996.00 5 9980 0.367 TOTAL   1888 £ 99,993.07             Calculation of the weighted beta of the portfolio Weighted average= investment value/total Weighted average beta=∑ (beta*weighted average) STOCKS BETA WEIGHTED AVERAGE WEIGHTED AVERAGE BETA BBA AVIATION PLC 1.15 0.0835 0.096 ASTRAZENECA PLC 0.88 0.0986 0.0868 PERSIMMON PLC 1.54 0.1551 0.2389 NETPLAY TV PLC 0.0783 0.0754 0.0059 WOLSELEY PLC 1.27 0.1287 0.1634 RYANAIR HOLDINGS 0.6144 0.0417 0.0256 FINSBURY FOOD GROUP 0.6217 0.0895 0.0556 COMPASS GROUP 0.7061 0.1397 0.0986 INMARSAT 0.5884 0.0882 0.0519 SEVERN TRENT PLC 0.367 0.0998 0.0366 TOTAL     0.8593         2) Explanation of the reasons for choosing each investment. BBA AVIATION PLC BBA Aviation Plc is a multinational aviation service company headquartered in London, United Kingdom. It provides aviation services as well as aftermarket support to operators of military and commercial aircraft, business and general aviation (BBA Aviation website). It operates two segments: aftermarket services segment and flight support segment. The Flight Support segment of the Company offers ground handling, refueling and other services to the general, business commercial aviation markets. The Aftermarket Services segment manufactures, maintains, support aerospace and engines systems, sub-systems and components. The business has significant operations in the US and in recent years it has meaningfully extended its operations to Africa, Asia and South America. In addition, it has expanded its operations in Europe (BBA Aviation website). The following are the reasons for considering an investment in BBA Aviation equity. Firstly, the company’s revenues have remained relatively stable (flat). It has grown its net income from $110.6M in 2013 to $138.5 million in 2013, a pattern that will continue in the future. Secondly, the company has generated positive cash flows, and it is likely to continue generating cash flow. Finally, the company is rich with tangible assets, primarily in the form of property, plant and equipment that total $0.557 billion (BBA Aviation financial statements). According to Michael Bow, a reporter at City A.M. this provides an excellent hedge against the risk of inflationary effects of the monetary policies of the Bank of England. ASTRAZENECA PLC AstraZeneca Plc is a global biopharmaceutical firm that discovers manufactures and sells prescription medicine for areas such as neuroscience, cardiovascular, infection, oncology, gastrointestinal, and respiratory and inflammation (AstraZeneca Plc website). The company continues to grow despite the difficult financial situation because it operates a range of marketing, production and R&D facilities worldwide. The company’s long term sales grow at a rate more than 7 percent while its earnings per share is growing at an average rate of 19.9%. The company again possesses a strong balance sheet with a total of $10.013 billion in cash and short term investment. It has a long term debt of only $ 8,588 million (Financial times). The cash flows of the company are constant because the demand for medicine is always stable as many customers need to repeat-purchase. The company’s new management has ended its share buyback programme and focused on acquiring companies and drugs. This has the potential of boosting its sales over the long run (Financial times). For example, the company has purchased the shares of Bristol-Myer Squibb, a move that could result into improved sales and profitability in the long run. PERSIMMON PLC Persimmon Plc is a house building company that operates within the United Kingdom. It operates in three segments, North division, Central division and South division. . Persimmon Plc is a good investment because it has consistently generated positive operating cash flows throughout the downturn in the housing market and UK economy. This implies that the company will generate a high amount of cash flows when the housing market in the UK recovers. Further, the UK market has not experienced overbuilding, so demand for housing is likely to be high due to the growing population. And regardless of market conditions, there is a possibility of high demand for homes in the UK (Wright et al., 128). NETPLAY TV PLC NetPlay TV Plc is the largest interactive TV gaming company in the UK. The company creates great TV show format using their extensive knowledge and proven ability. This unique combination has enabled the company to develop highly successful brands which are played by people online, on TV and on the mobile (NetPlay TV website). The company has had two notable developments which have helped the growth process. According to the CEO of NetPlay TV, Charles Butler, the two developments, sponsorship of both Celebrity Big Brother 2013 and Big Brother 2013 and extension of agreement with ITV will work to increase their customer outreach significantly thus continuing the momentum (Money AM). These increased customer acquisitions are very profitable for the company as they increase its stock performance. WOLSELEY PLC Wolseley Plc is the world’s leading distributor of plumbing and heating products to the professional market. It is also the leading distributor of building materials. It builds its business through the quality of their people’s excellent service and strong relationships with customers and vendors (Wolseley website). The company possesses a strong financial position that according to Ian Meakins, CEO, will make the company launch a £250 million share buyback programme. According to Chief Executive Ian Meakins, Wolseley is highly cash generative with sufficient resources to fund the company’s future investment. For these reasons, Wolseley has a future potential growth hence a good investment. RYANAIR HOLDINGS Ryanair Holdings is a low-cost airline with operational bases at London Stansted Airports and Dublin Airport. The airline has had rapid expansion due to the success of the low-cost business model and deregulation of the European aviation industry. According to The Economist, the company’s continued success is attributed to its innovative and nimble strategies as well as its willingness to go against the grain in its operations. The consensus forecast of the investment analysts asserts that the company will outperform the market (Financial Times). According to Brighter Planet, Ryanair Holdings is the most efficient airline as it uses only a third of the fuel in transporting its average passenger per mile. The airline has a good financial performance since it gets many passengers due to its low costs. For instance, despite a 31 percent rise in fuel prices, it realized a 32 percent increase in operating profits and the trend is likely to continue. FINSBURY FOOD GROUP Finsbury Food Group is the leading bread and cake manufacturer to the main UK multiple grocers. The company maintains a policy of creating and launching new products. In addition, it has ongoing commitment to innovation and product quality (Finsbury Food Group Website). The company aims at taking advantage of acquisitions to drive their medium-term to longer term value. For instance, the company has reached an agreement to acquire the Fletcher group. According to John Duffy (CEO of Finsbury Food), this will go a long way in driving growth for their shareholders through diversification of product and customer offering. The acquisition will also allow the company to increase it scale. In addition, it will provide financial cost and operational synergy opportunities for the companies thus ensuring growth and successful integration. Further, it will create value by driving operational efficiency and revenue for the company hence increasing its performance in the medium-term (London Stock Exchange). COMPASS GROUP Compass Group is the world’s largest provider of contract food and support services to schools, offices and factories, universities, sports and cultural venues, hospitals and mining camps. Its hospitality has enabled it to serve around 4 billion means per year in over 50,000 locations globally (Compass Group website). The company adopts an innovative business structure in their operations. This has permitted the company to have a very successful year. According to the City AM, the company has also returned £1bn to its shareholders through a special dividend. It has also had strong business gains which are likely to continue. Further, the stock is a better investment because its earnings per share growth look positive. INMARSAT This is a British satellite telecommunication company that provides global mobile services. It provides high-speed data communication and reliable voice connectivity to users globally. The company’s network provides a range of remote telecommunication services to governments, businesses, aid agencies, and media outlets for use at sea, on land and in the air (Inmarsat website). According to Hela Miar, the Share Centre’s investment analyst, Inmarsat has a potential of delivering over the coming year. This is due to the company’s pricing initiatives which position the company well to meet revenue targets for the coming year. Further, the company aims at providing airline Wi-Fi with its new broadband networks (Europasat and Global express) in the skies across Europe by 2016, a move that David Willetts, a minister for universities and science says that is a good investment that will promote growth and productivity (City A.M.). The CEO also said that the company also considers investment to the maritime industry. The company also provides the highest profit margins to investors making it safe investment targets. SEVERN TRENT PLC Severn Trent Plc is a water company in the UK that supplies approximately 3.7m businesses and households in the area. The company operates a call centre in Coventry that deals with billing enquiries and operational emergencies (Severn Trent website). Severn Trent Plc could be profitable because the Ofwat’s recent guidances provide the water sector with flexible decision over returns. A recent comment by RBC Capital that Ofwat’s softening stance has left the door open for companies in the water sector to achieve additional significant financial incentives for outperformance. This implies that the achievable could be as high as 5.55 percent. Consensus forecast has also recommended that investors should hold their position in the company because it would outperform the market (Financial Times). This is an indication that the stocks of the company will perform better. 3) Effects of buying shares to reflect the FTSE 100 index on the market FTSE 100 index refers to a share index of the 100 largest companies that are listed on the London Stock Exchange. The companies are identified by market capitalization. Such companies are often referred to as “blue chip companies” (Jones, 280). The index is one of the most extensively used stock indices because it is often seen as a gauge of the prosperity of businesses that are regulated by the company law of the UK. Traditionally, it is seen as a good performance indicator of major companies that are listed in the UK. Such companies have more than £2 billion in value. It should regularly be calculated instantly to reflect changes in the prices of its constituent companies. FTSE stands for Financial Times stock Exchange. The index’ composition is revised quarterly so that old companies that their capitalization has changed are replaced. Computation It is calculated using the formula: Index level= ∑i [(number of sharesi*price of stocki)* free float adjustment factor]/index divisor In the FTSE indices, the share prices should be weighted by total market capitalization by their effect on the index in order that bigger companies make more of a difference to such index than smaller companies (Baird, 108). Index divisor is got by dividing total market value by index value (total weighting) which is normally 100%. The free float adjustment factor denotes the proportion of free floated shares as a percentage of the shares issued. For calculation purposes, it is often rounded up to the nearest multiples of 5 percent. The total market capitalization of the 100 companies is then multiplied by the free float adjustment factor and then the product is divided by index factor to get the FTSE 100 index (Baird, 108). The behavior of buying shares to reflect the FTSE 100 index by investment managers has a common market impact. One problem arises when a substantial amount of money is used to buy a given share to reflect the index as it may make a company worth more than before. A company that is added to the FTSE 100 is likely to experience demand shock while a company being replaced can experience supply shock, as a result, the share price of smaller companies changes (Jones, 284). In addition, this behavior is likely to cause over diversification because the investments managers will own hundreds and thousands of shares instead of owning 20-40 stocks. This destroys the long-term investment returns of the smaller companies. Such shares have done well in the past but had less potential for doing well in the future (Stevenson & Mladjenovic, 125). This behavior by investment managers is likely to reduce the stock performance of the smaller companies due to lower returns because such stocks do not carry greater potential to outpace the market. References AstraZeneca Plc website: Retrieved from: http://www.astrazeneca.com/Home Baird, C. W. (2009). The complete guide to investing in index funds: how to earn high rates of return safely. Ocala, Fla, Atlantic Pub. Group. BBA Aviation financial statements: retrieved from: http://markets.ft.com/research/Markets/Tearsheets/Financials?s=BBA:LSE&subview=BalanceSheet BBA Aviation website: Retrieved from: http://www.bbaaviation.com/ Cahhil, M., (2013). Financial Times Guide to Making the Right Investment Decisions: How to analyse companies and value shares. Pearson: London. City AM, Wolseley share buyback programme: Retrieved from: http://www.cityam.com/1412064180/wolseley-shares-company-reveals-25m-share-buyback-programme City AM: Business Services Firm of the Year: Retrieved from: http://www.cityam.com/awards/categories/business-services-firm-of-the-year City AM: Inmarsat plans: Retrieved from: http://www.cityam.com/article/1402017180/inmarsat-plans-wi-fi-sky-across-europe Compass Group website: Retrieved from: http://www.compass-group.co.uk/ Financial times, Ryanair Holding consensus forecast as of October 25, 2014: Retrieved from: http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=RY4B:ISE Financial times: AstraZeneca financial statements: retrieved from: http://markets.ft.com/research/Markets/Tearsheets/Financials?s=AZN:LSE&subview=BalanceSheet Financial Times: Consensus recommendation: Retrieved from: http://markets.ft.com/research/Markets/Tearsheets/Forecasts?s=SVT:LSE Finsburry Food Group Website: Retrieved from; http://www.finsburyfoods.co.uk/about/ Inmarsat Financial Times: Retrieved from: http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=ISAT:LSE Inmarsat website: Retrieved from: http://www.inmarsat.com/ Jones, C. P. (2010). Investments: analysis and management. Hoboken, NJ, John Wiley & Sons, Inc. London Stock Exchange: Finsbury Food Group plc Acquisition of the Fletchers Group Retrieved from: http://www.londonstockexchange.com/exchange/news/market-news/market-news-detail/12111839.html Money AM, NetPlay TV Plc: retrieved from: http://www.moneyam.com/InvestorsRoom/posts.php?tid=17156 NetPlay TV website: Retrieved from: http://www.netplaytv.plc.uk/netplaytv/ Severn Trent website: Retrieved from: http://www.severntrent.com/ Stevenson, D., & Mladjenovic, P. J. (2012). Investing in shares for dummies. Chichester, J. Wiley & Sons.  Wolseley Plc website: Retrieved from: http://www.wolseley.com/  Wright, M., Siegel, D. S., Keasey, K., & Filatotchev, I. (2013). The Oxford handbook of corporate governance. Read More