Closure of High Street Businesses and Drop of Yells Share Price - Dissertation Example

? Is Closure of the High Street Businesses A Key Factor In The Drop of Yell’s Share Price ? Introduction UK economy experienced a recession sometime in mid-2008 although confirmed only towards the end of that year. Consumer spending was down. Consumer confidence was very low. Unemployment was high. See charts on the next pages. The Bank of England explained how to overcome the problem of experiencing a stagnant growth with Quantitative Easing ( BoE 2009, p. 10). Although the government had injected ?200 billion into the financial market, banks held on to most of the funds in order to strengthen their liquidity in preparation for a possible double-dip recession. Its lending operations were limited to the large corporations that could issue bonds to secure loans. When some of the money supply reached those big businesses, the owners and management utilized additional funds to similarly strengthen their balance sheets. In a survey about the SME Access to Finance conducted by the Scottish Government Chief Economic Adviser (2011, p.2), the importance of SMEs was emphasized. They made up 99% of all businesses in Scotland. “The results showed that the demand for finance (working capital) had increased but that approval rates for applications had fallen. Many firms also perceived the costs of credit to have risen…(p.2).” And the “Overall lending to Scottish SMEs in 2010 is lower than in 2009, reflecting a combination of weak demand and constraints in supply of lending (p.4)”. In another survey by Dr. Fraser, Stuart (2009, p.5), 2,500 SMEs were surveyed in UK. It was discovered that SMEs in UK utilize credit cards (55.3% of SMEs from 2001-2004 and 54.4 % of SMEs in 2005-2008). Their other sources of financing were as follows: a. Invoice Financing – “3 % of SMEs in 2001-04 to 2.2 % in 2005-08” (p.5) b. Equity Finance – 3 % c. Credit from Suppliers – 33 % d. Loans from Friends – “5.6% in 2001-4 to 7.0% in 2005-08” (p.5) e. Loans from Family Members – “9.8% in 2001-4 to 14.4% in 2005-8” (p.5). Banks considered loans to SMEs riskier by 2008 due to the economic crisis. Issues about SMEs of UK are critical to the business of Yell Group PLC because its market is made up of these SMEs. Miscon de Reya (2010, p.6) generated a survey of SME Entrepreneurs in UK and even reported that 99.9 % of the businesses in UK are made up of 4.8 million SMEs. In the results of survey, it was discovered that 62 % had to resort to self-finance or savings to fund a business. Only 26 % borrowed from banks. (p. 19) Following are the charts showing low consumer spending, low consumer confidence, and high unemployment compared to the time before the recession. All are relevant because SMEs could not do well as a result of a poor economic climate. Yell will also feel the crunch because its customers are SMEs. (Source: Oxford Economics: UK Forecast in Detail 2011, p. 63) (Source: Oxford Economics: UK Forecast in Detail 2011, p. 62) ( Source: Bank of England Inflation Report 2011) Note that Velocity of Circulation refers to the time it takes for the banks to make funds available to the public, including SMEs, large corporations, and private individuals. Objectives: 1. To determine why the Share Price of Yell Group PLC has been declining since 2010 up to the present; 2. To establish whether or not the closure of high street businesses is a major factor for the decline of the Share Price of Yell Group; 3. To provide the logical evidence that support the explanation for the Share Price decline 4. To identify other factors that may be causes for the Yell Group PLC’s share to decline. Serving these objectives will lead to the utilization of quantitative tools for decision making with the pricing of stocks. Literature Review Overview A quick look at the chart and table of Yell Group PLC’s Stock value since the year 2003 up to the present ( See appended Charts & Tables.) shows a downward trend from the latter quarter of 2007 all the way to the present. A year ago, in April 21, 2010, the price index was at 59. That has substantially dropped down since then to only 6.48. Coincidentally, international recession had been reported to have started in December 2007 although officially announced only in December 1, 2008 or one year later, by the NBER (National Bureau of Economic Research in, USA). That recession became the major global economic change negatively affecting a worldwide economic system (including UK) which threatened to bring about another depression similar to that of the 1930s. And so far, it has not gone to such a disaster. The recession has become comparable instead to the 1987 US Stock Market Crash “with a one-day fall that was as bad as the first day’s fall of the 1929 crash. But the Federal Reserve pumped cash into the system; the real economy didn’t even slow down, and the DOW soon recovered.” This was according to Paul Krugman (2008, p. 22). Today’s recession was actually worse than that 1987 short-lived economic recession, because this one has lasted for over 2 years since the date it was announced until the present. Both USA and UK have already injected over a trillion US dollars combined -- $ 787 billion ( about ?492 billion) approved by the US Congress in February 2009, and ?200 billion (about $ 320 billion) approved by the Bank of England. By August and November 2010, another $ 600 billion was injected for the US economy (called QE2). QE2 stands for the 2nd Quantitative Easing. Businesses in the high street were affected by recession in UK. Consumer spending took a dive along with consumer confidence. Industries became less productive. Unemployment soared from 5.2 % in January 2008 to 8 % in March of 2010. Inflation rate increased after the government injected more money into the system. However, there were signs of recovery by 2010 for the entire UK economy but not for Yell Group PLC. This formal study presents the facts and analysis about what happened to this member of the Service Industry. Theories of Share Price Valuations Values of Shares of Stocks represent values of a company it represents. There are many ways or combination of tools that determine the price of a stock in the financial market. Theoretically, a stock is worth the total value of a company divided by the number of shares of stock issued and outstanding. And so the question is about how much is the value of the company at any given time ? Whatever is the total cash that a company can generate during its lifetime computed to its present value is the theoretical value of the company. There are some popular tools involved other than the formula to compute for Present Value using tables found in Math of Investments books. There is the DCF (Discounted Cash Flow) Calculator which determines the fair market value of a stock at the present value of its future earning. Another tool is the Price over Earnings Ratio or P/E Ratio. This is one of the most popular techniques before making decisions to buy Stocks in the Financial Market. It reports the number of years an investor can earn out of the shares. A third tool would be the P/S Ratio or Price to Sales Ratio. It provides the indicator of a company’s potential growth after computing for the “Price divided by the annual sales per share”. This formula has a weakness. It does not reveal the amount of debts of the company. It can be that the resulting figure looks good. But the company is about to be bankrupt. When using the tool, it is better to use it along with the other tools like Debt-to-Equity Ratio to identify whether or not the company is liquid as it operates profitably. The 4th tool available for the study of the value of stock prices is the PEG Ratio. Theoretically, the Price over Earnings Ratio is equal to the Growth Rate. Traders just utilize this formula as a rule of thumb. Benjamin Graham experimented with other rules of thumb. The result was his Graham Formula, P/E = 8.5 + 2G or Price over Earnings should be equal to 8.5 + twice the Growth Rate. This represents the 5th alternative tool which will be discussed further. A 6th tool for the computation of Stock Prices would be the Dividend Discounting Formula. It serves like a discounted cash flow that can enable the analyst to say whether or not the present value of future earnings will be attractive to an investor. This was made popular by John B. Williams who earned his doctorate degree after publishing the book entitled Theory of Investment Value. Buffet Formula is another tool. This was named after one of the richest men in the world, the owner of Berkshire Hathaway, Warren Buffet. He was just a door-to-door salesman selling chewing gums, Coke, and magazines, grocery items, and became good at investing in the stock market, until he became a billionaire and is presently worth $ 50 billion at the age of 81. His calculator of earnings is based on probabilities and will represent the 7th alternative tool. Finally, there is a more complicated formula known as the CAPM or Cash Asset Pricing Model. It first measures risk using the equation Kc = Rf + beta x (Km –Rf ). Kc would be the discount rate adjusted by risk. It is also the Cost of Capital. Rf is a rate of the investment that is actually risk free. Km would be a benchmark of the S & P and its rate of return. The idea is to evaluate whether or not the earnings will be worth the risk. SWOT ( Strengths, Weaknesses, Opportunities, and Threats) Analysis will be needed as a tool to understand some other reasons outside of the traders’ computations in the Stock Market. It will facilitate organization of information gathered from external sources like the Services Industry and the UK economy as well as global economy. It should be noted that Yell Group PLC is not only doing business within UK. The company has many other branches in other countries. All these tools may be utilized to asses the Yell Group PLC in order to find out why the price has been going down. Economic Background Statistical Tables, Graphs, and Charts The UK Economy maintained interest rate of its Central Bank to only 0.5 % and yet there was very low productivity and low financial activities in the country. Unemployment was high. There are approximately 4.8 million SMEs in the UK according to a survey of the BIS (2010, p. 9). How did this affect Yell ? To properly identify the situation of Yell Group PLC within the economy, it would be necessary to give a little description about what the business has been all about. Yell’s aim is to be a marketing arm of SMEs (Small and Medium Enterprises) in countries wherein the group operates, namely, UK, US, Spain, Chile, Peru, and Argentina. It is engaged in the service of providing advertisements to the target customers. It provides telephone directories that businesses can utilize to do telemarketing. The company also provides phone service assistance, website development, banner advertising, pay-per-click advertising, linking to social networks. It began as a small business in 1966 when the company only had one classified ad section in a telephone directory. Then it purchased the largest directory publisher in the USA in 1999. The purchase value was $ 665 million. It continued to expand in the other countries mentioned above and now has a manpower of 12,600 employees. As of the fiscal year ending March 2010, its total sales was ?2.123 billion and its EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) was ?620 million. Thus, although it serves SMEs, Yell has been a large corporation by itself. Yell used to be the leader in the market among the members of the same industry. In the latest 2011 Interim Financial Report, it reveals the company position to be ahead in market share both in the USA and the UK. During the recession, sometime November 2008, it had to lay off 1,300 employees in a bid to cut cost. If this is the case, why is it that the price of its stocks have gone down considerably ? There are Annual Reports available online. Its major problem as of the present are twofold, namely, (1) Yell was heavily in debt to the tune of over ? 3.1 billion for the fiscal year ending March 31,2010; (2) The Stock Price of Yell per share is down to ?6.48/ share and the number of shares available are 5,437,400 shares. With total assets amounting to around ? 6 billion, the business has an Equity Base that is far below the debt balance. But why ? What happened ? UK Services Industry Compared to other members of the industry, specifically the publications industry, Yell was not doing well. The following table will show that there are those who registered growth. ( Source: Yahoo Finance for UK and Ireland, Available @ http://uk.finance.yahoo.com/q/in?s=YELL.L ) It then appears that Yell has been losing the competition partly due to the heavy indebtedness and partly due to reasons that have yet to be discovered. The Services Industry of UK was not exempt from the negative effects of recession. As can be viewed from the Bank of England Chart of performance by industry (below), even the services sector experienced a decline during the recession. As a matter of fact, the entire industry has not yet recovered the usual business level prior to the recession. ( Source: Bank of England, 2011) Analysis of Multiple Experts or Authorities Based on News Reports In a recent news at Telegraph.co.uk, the Chairman of Yell Group PLC reported that the company has been struggling in the competition against “internet rivals” (Sibun, J. 2011). The capitalization of the corporation is 2,367,603,929 ordinary shares of stock x 6.4 price per share. The recently installed CEO Mike Pocock reported (Coventry, S. 2011) that the print industry of directories is into a permanent decline, while the Yell Group business was still earning 69 % of its revenue in the printing of directories. His analysis was that the declining demand for print media has been pulling down the performance of Yell Group PLC. However, these are just clues to the more accurate reasons why other members of the industry are doing better while Yell has still not recovered from the recession effects. Further research and analysis will be necessary to find out what are the major factors that have been causing the share price of Yell to continue going down. Indeed the Financial Report of Yell in 2010 reported a growth in the internet business up to ?415 million. It was 20% of the total revenue and an increase of 15 % from the previous year. The company claims that 42 million people utilized the online facilities of Yell. 50 % were in the USA. 28 % are in the UK. Spain and Latin America made up 22 %. Strategy and Methodology Research of events that took place starting from the time there was an indicator of a share price decline will be performed for three levels, namely, (1) events about the UK Economy, Economic Indicators, and the Global Economy, (2) events about the Yell Group PLC within the same period, and (3) financial analysis of Yell Group PLC and leading competitors. The primary data will consist of a survey and analysis of the group’s financial data as well as the financial data of competing performers. Secondary data should be coming third party analysis of the situation of Yell Group PLC. The theories about how stocks are priced in the financial market will be compared against the surveyed financial data as well as against the analysis of investors. Rationalization of events against or for Yell will be presented and analyzed. And then, based on the findings, the answer to the dissertation main question should be answered clearly. Explanations for Share Price decline will lead to an understanding about the considerations that are believed to be important in the financial market. After all the possible ways of analyzing what may have gone wrong with Yell Group PLC and why its Stock Price continued to dive since the time of the recession, there should be conclusive evidence about the main explanation. The hypothesis is that Yell Group PLC was not able to maintain its competitive standing in the Services Industry after a series of negative impact of the recession on the profitability of its business. Multiple quantitative tools will be utilized in an attempt to discover what is it or what factors made brokers and investors arrive at decisions not to buy Yell Stocks. Furthermore, SWOT Analysis will also be very useful to discover the strengths, weaknesses, opportunities, and threats within the company and in the external environment. 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Williams, John Burr (1938 ). The Theory of Investment Value. Harvard University Press 1938; 1997 reprint, Fraser Publishing. ISBN 0-87034-126-X Schedule of Project Activities From Start to Finish Gantt Chart April 2011 to February 2012 Read More