Numerona Shareholders Club was recently formed by six MBA course colleagues to try and generate some return on capital, to be put towards their MBA course fees. Each group member has invested £1000, giving the Shareholders Club a total of £6000 to invest.
The group selected three companies (DryShips Inc, Kraft food and The Walt Disney) from different sectors in order to get a diversified portfolio, which will enable the group to reduce risk and maximize returns.
Therefore, this report assesses the changes taking place in the business environments of the three companies, and how these changes impact them. To do this we examined each company using PEST(le), SWOT, Porter's five forces, and Financial Analysis in order to make an informed investment decision.
DryShips Inc. is a Greek holding company with principal executive office in Athens. They are a global marine transportation company with their core business in drybulk cargo. The company is divided into two operating groups: The Drybulk Carriers (79.7% company's revenue) and Drilling Rigs (20.3% of revenue).
The company is the 2nd largest operator in the USA and has been listed on the New York Nasdaq Exchange since Feb 2005.
The Drybulk Carrier Group has a fleet of 40 ships and transport a variety of raw materials and dry bulk, globally, comprising of coal and iron ore, iron and steel products, minerals, fertilizers, forest products, bauxite, alumina, ores, cement and other materials used in construction.
On May 2008, DryShips Inc. acquired Ocean Rig, a Norwegian offshore drilling services company, and can operate in ultra-deep water and extreme conditions.
DryShips Inc's focus is to maximize shareholder value by maximizing returns on the investments, whilst at the same time ensuring that their vessels adhere to the necessary safety and environmental standards (Source: DryShips website).
Kraft Foods Inc is the world's second largest food company, and the largest in North America. It manufactures and markets packaged food products, including snacks, beverages, cheese, convenient meals and various packaged grocery products. During the year ended December 31, 2008, the Company had operations in more than 70 countries and sold products in approximately 150 countries. Kraft manages and operates, through two commercial units: Kraft North America and Kraft International.
Kraft North America operates in the United States and Canada. On August 4, 2008, the Company completed the spin-off of its post cereals business. The brands of the Company span five consumer sectors: snacks, beverages, cheese, grocery and convenient meals.
Kraft's vision is to meet consumers' needs and making food enjoyable and healthier (Source: Kraft Foods website). Kraft strives to deliver the message to their consumers that they value the importance of health and wellness and to provide the best and to deliver the value and quality of their products and services.
Porters 5 forces analysis
Walt Disney Company (founded in 1923), with its subsidiaries and affiliates, is a leading global family entertainment and media company, with operations in four different business segments: Media Networks, Parks and Resorts, Studio Entertainment and Consumer Products. The company employs over 150,000 people worldwide (September 2008) across the various segments. Disney's mission Statement is to create happiness by providing the finest in entertainment for people of all ages, everywhere (Source: The Walt Disney website). The Walt Disney is divided in to four segments and the details are as follows:
The Media Network segment includes: domestic broadcast television networks, television production and distribution operations, domestic television stations, cable networks, domestic broadcasting radio networks and stations and Walt Disney Internet Group (WDIG). Key business units include; ABC Television Group, ESPN Inc. and Walt Disney Internet Group. Disney sales, marketing, research and communications are also part of this business segment.
Parks and Resorts
The Parks and Resorts include; Walt Disney World Resort (Florida), Disneyland Resort (California), Disney Vacation Club Resorts, Disney Cruise Lines, Adventures by Disney, ESPN Zone, Disneyland Resort Paris (through joint venture with Euro Disney S.C.A. - 51% Disney ownership), Hong Kong Disney (joint venture with Hong Kong International Theme Parks - 43% Disney ownership) and Tokyo Disney Resort (licensed to The Oriental Land Company).
Walt Disney Studio Entertainment
The Walt Disney Studios produces animated and live-action motion films, live stage plays, direct-to-video programming and produces musical recordings. This includes: a) Walt Disney Motion Pictures Group, Pixar Animation Studios, DisneyToon Studios, Touchstone Pictures, Hollywood Pictures and Miramax Films and Disney Theatrical Productions. b) Direct-to-video programming, with distributions through Walt Disney Studios Home Entertainment. c) Musical Recording, such as Walt Disney Records, Hollywood Records and Lyric Street Records.
Disney Consumer Products (DCP)
Disney Consumer Products and affiliates, design, promote and sell the Disney Brand, which is divided into a range of business units which include: Disney Toys, Disney Apparel, Accessories & Footwear, Disney Food, Health & Beauty, Disney Home and Disney Stationery.
Within the Consumer Product Segment, Disney is also a major publisher in children's books and magazines through their Disney Publishing Worldwide.
Disney has recently acquired Marvel Entertainment, which is not included in the 2008 annual report, therefore will not be included the financial analysis.
Kraft is managing its supply chain well as compared to the industry, sector and S&P 500 in general and has a reasonably good operational efficiency. Kraft's 5 year average inventory turnover suggests that it should watch out for inadequate inventory which may lead to loss of business.
CAPM (Capital Asset Pricing Model)
Beta = 0.63 as of November 20th 2009
Kraft has a low beta indicating the low expected market return
Risk Free Rate (US Interest Rate) = 0.25 as of December 1st 2009
Market Return = 23.34 based on S&P 500 indices tracked by SPY as of close of December 1st 2009
Beta = 0.63 as of November 20th 2009
Required Return = Rf + (Rm - Rf)
= 0.25 + 0.63(23.34 0.25)
As per capital asset pricing model Kraft required rate of return is 14.8, considering that Kraft has given a return of 10 to 14 percent over last 4 years it is more likely than not that Kraft will meet or beat the expected 14.8 required return.
DryShips has faced headwinds due to slowdown in global economy and its badly negotiated acquisition of drilling company resulting in huge losses and goodwill impairment, it has seen a huge decline in its market price and will have to learn to manage diversified business of drilling to remain viable in slowing global markets. Considering the stock reflects this reality, as per capital asset pricing model, expected rate of return is pretty high at 85.6, considering the market price is below 10 dollars and the historic average rate of return in the range of ve to 47, we consider it a good investment at its current prices which are attractive and can enhance the portfolio performance when global trade increase.
Kraft is on a crossroad but very attractive at its current price level as reflected by current asset pricing model expected return of 14.80 which is close to the historic average rate of return Kraft has given, if it's bid of Cadbury is successful it will increase its market share and based on the management's policy of strong dividend it would meet or beat the expected rate of return enhancing the portfolio value of Numerona shareholder club. In the other scenario where it fails to acquire Cadbury we will have to reassess our view of long term profitability of Kraft and readjust our portfolio accordingly.
Disney is a market leader as reflected in the scoring matrix, it is well managed but it is not as attractive at current price level as reflected by capital asset price model expected return of 25.42. Considering the high barrier to entry in Disney's marketplace they face known competition, in addition with growth around the globe for the Disney brand it will remain profitable to invest in.
There is a direct decrease in standard deviation as the number of stocks in the portfolio increase from it being highest when portfolio has 1 stock and it being lowest possible when portfolio has 5 stocks in the portfolio before it becoming constant. We will choose 3 stocks in our portfolio from as diverse an industry as possible. Our risk will be close to minimum.
Based on the min and max rate of return of the portfolio rate of return in the appendix section which is in the range of 7.5 to 20.33 and a standard deviation of 27.43 as calculated in portfolio risk section above the portfolio is expected to perform in the range of 34.06 and 47.76 which clearly beats the expected rate of return of 30.1566 for the portfolio. Conservative point of view based different economic condition estimated rate of return of 14.5% is the minimum expected return for this portfolio. All 3 chosen stocks have a positive correlation with each other and we need to diversify our portfolio further with instruments which have a balancing negative correlation with Kraft, Disney and DryShips in future.
Disney, Kraft and DryShips are good candidates to be part of the diversified portfolio and represent a significant opportunity for maximising the profit for Numerona shareholder club portfolio based on the technical analysis of various ratios, computing capital asset pricing model beta, expected rate of return, portfolio risk, portfolio return variance and portfolio standard deviation. We will take the suggested positions while elaborating portfolio variance and standard deviation of £3000 in Kraft foods, £2000 in Disney and £1000 in DryShips.
- Annual Reports for DryShips Inc., Kraft food and The Walt Disney 2005, 2006, 2007, 2008<http://dryships.irwebpage.com/ir_reports.html>, <http://kraftfoodscompany.com/investor/sec-filings-annual-report/annual_reports.htm>,<http://corporate.disney.go.com/investors/annual_reports.html>
- Annual Reports for competitors: Diana Shipping Inc., Time Warner Bros., and Unilever 2005, 2006, 2007, 2008 <http://www.dianashippinginc.com/default.asp?siteID=1&pageid=75&langid=1>,<http://ir.timewarner.com/phoenix.zhtml?c=70972&p=irol-reportsAnnual>, <http://www.unilever.com/investorrelations/annual_reports/>
- Arnold, G. (2008) Corporate Financial Management, 4th edition, Chapter 2, 7 and 8.
- Bornozis, N. (11/18/2009), DryShips ship acquisition data, Earthtimes, Last Accessed on: 12/05/2009, <http://www.earthtimes.org/articles/show/dryships-announces-the-acquisition-of-two-panamax-vessels,1053685.shtml>
- DryShips company overview, Last Accessed on: 15/11/2009<http://www.dryships.com/>
- Financial ratios for Sector, Industry and S&P: <www.reuters.com>
- Goddard, S. (2009), Nottingham University Business School, MBA Finance Module, Sessions 6, 7, 8 and 10
- McLintock, A. (2009), Nottingham University Business School, MBA Accounting and Finance Module, Financial Statement Analysis, Sessions 3 and 4.
- Porter, M., 1995., Competitive Advantage, The Free Press.
- Raffa Consulting, Accounting, and Technology (1999), Reading and Understanding Financial Statements: A guide to Financial Reporting, pp. 1-16.
- Shipbuilding market share figures (15/02/2007): Global Shipbuilding: An Overview, Equity Master, Last Accessed on: 05/12/2009, <http://www.equitymaster.com/detail.asp?date=2/15/2007&story=1>
- Walton, P. and Aerts, W. (2006) Global Financial Accounting and Reporting: Principles and Analysis, 2nd edition, Chapter 8, 9, 10, 17 and 18.