Part 1 For this assignment you will conduct a comparative DuPont analysis of two
ID: 2683227 • Letter: P
Question
Part 1 For this assignment you will conduct a comparative DuPont analysis of two companies. Using a search engine, find one large corporation included in the S&P 500. Then, find one of its largest competitors. Go to the investor relations portion of each homepage and find the most recent annual report Calculate a complete DuPont analysis calculating the ROE, ROA, the profit margin, total asset turnover and equity multiplier. Critique the differences between the two corporations in approximately 100 words.Part 2 Using the most recent income statements (annual) for the two corporations from Part 1 of the assignment, calculate a common size analysis using a spreadsheet. Discuss the differences in the two corporations in approximately 75 words. Your answer can be completed below your spreadsheet analysis.
Explanation / Answer
Sector analysis involves identification and analysis of various industries or economic sectors that are likely to exhibit superior performance. Academic studies indicate that the health of a stock's sector is as important as the performance of the individual stock itself. In other words even the best stock located in a weak sector will often perform poorly because that sector is out of favor. Each industry has differences in terms of its customer base, market share among firms, industry growth, competition, regulation and business cycles. Learning how the industry operates provides a deeper understanding of a company's financial health. One method of analyzing a company's growth potential is examining whether the amount of customers in the overall market is expected to grow. In some markets, there is zero or negative growth, a factor demanding careful consideration. Additionally, market analysts recommend that investors should monitor sectors that are nearing the bottom of performance rankings for possible signs of an impending turnaround.[2]
Quantitative cumulative value analysis: This method is also commonly referred to as fundamental analysis. Fundamental analysts consider past records of assets, earnings, sales, products, management, and markets in predicting future trends in these indicators and how they may affect a company%u2019s future success or failure. By appraising a firm%u2019s prospects, these analysts determine a stock%u2019s intrinsic value and assess whether a particular stock or group of stocks is undervalued or overvalued at the current market price. If the intrinsic value is more than the current share price, then this stock would appear to be undervalued and a possible candidate for investment. While there are several different methods for determining intrinsic value, the underlying premise is that a company is worth the sum of its discounted cash flows (DCF). The DCF is the value of future expected cash receipts and expenditures at a common date, which is calculated using net present value or internal rate of return. This means a company is worth the combined sum of its future profits, while at the same time being discounted in consideration of the time value of money. This value, as determined by the discounted cash flow analysis or its equivalents, consists of two components:
Management issues involves examining perceptions about management and perceptions by management. It includes various qualitative judgments regarding the competence of current and prospective company management, as well as issues related to insider buying, future strategies to increase operations and market share. Most large companies compensate executives through a combination of cash, restricted stock and options. It is a positive sign when members of management are also shareholders. When management makes large purchases of their own stock with private funds, it may indicate that management insiders feel the company is undervalued, or that a favorable company event will occur soon. Another way to get a feel for management capability is to examine how executives performed at other companies in the past. Warren Buffett has several recommendations for investors who want to evaluate a company%u2019s management as a precursor to possible investment in that company%u2019s stock. For example, he advises that one way to determine if management is doing a good job is to evaluate the company's return on equity, instead of their earnings per share (the portion of a company%u2019s profit allocated to each outstanding share of common stock). "The primary test of managerial economic performance is achievement of a high earnings rate on equity capital employed (without undueleverage, accounting gimmickry, etc.) and not the achievement of consistent gains in earnings per share." Buffett notes that because companies usually retain a portion of their earnings, the assets a profitable company owns should increase annually. This additional cash allows the company to report increased earnings per share even if their performance is deteriorating. He also emphasizes investing in companies with a management team that is committed to controlling costs. Cost-control is reflected by a profit margin exceeding those of competitors. Superior managers "attack costs as vigorously when profits are at record levels as when they are under pressure". Therefore, be wary of companies that have opulent corporate offices, unusually large corporate staffs and other signs of bloat. Additionally, Buffett suggests investing in companies with honest and candid management, and avoiding companies that have a history of using accounting gimmicks to inflate profits or have misled investors in the past.[5]
Technical analysis: Involves examining how the company is currently perceived by investors as a whole. Technical analysis is a method of evaluating securities by researching the demand and supply for a stock or asset based on recent trading volume, price studies, as well as the buying and selling behavior of investors. Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts or computer programs to identify and project price trends in a market, security, fund, or futures contract. Most analysis is done for the short or intermediate-term, but some technicians also predict long-term cycles based on charts, technical indicators, oscillators and other data.
Examples of common technical indicators include relative strength index, Money Flow Index, Stochastics, MACD and Bollinger bands. Technical indicators do not analyze any part of the fundamentals of a business, like earnings, revenue and profit margins. Technical indicators are used extensively by active traders, as they are designed primarily for analyzing short-term price movements. The most effective uses of technical indicators for a long-term investor are to help them to identify good entry and exit points for a stock investment by analyzing the short and long-term trends.
Stock screening is the process of searching for stocks that meet certain predetermined investment and financial criteria. A stock screener has three components: a database of companies, a set of variables and a screening engine that finds the companies satisfying those variables to generate a list of matches. Automatic screens query a stock database to select and rank stocks according to user-specified (or pre-specified) criteria. Technical screens search for stocks based on patterns in price or volume. Fundamental screens focus on sales, profits, and other business factors of the underlying companies. By focusing on the measurable factors affecting a stock's price, stock screeners help users perform quantitative analysis. Screening focuses on tangible variables such as market capitalization, revenue, volatility and profit margins, as well as performance ratios such as the PE ratio or debt-to-equity ratio.[6] For example, an investor may want to do a search using a screen for all those companies that have a price/earnings ratio of less than 10, an earnings growth rate of more than 15%, and a dividend yield of more than 4%.
Many Investors take advantage of software programs or online subscription services that allow them to select stocks based on a customized set of conditions and variables. Some examples of various types of stock screening services are: