Industry Background
The company chosen to be the focus of the discussion in this paper is Arcelik AS. It is a publicly listed firm in Turkey, under the Istanbul Bourse (formerly the Istanbul Stock Exchange). For the industry, analysis, two industries will be focused on since Arcelik AS markets a wide range of products in more than 100 countries. Its two biggest departments would be the consumer electronics and home appliances department. The company is a known manufacturer or white goods or large electrical products. Some of the best examples would include refrigerators, washing machines, freezers, dishwashers, coffee makers, food processors, vacuum cleaners, and aspirators, among others. The company has around five thousand branches in Turkey alone. The company also controls around thirteen international subsidiaries, through which it markets its own products and services into key markets. The company’s top three largest markets for export would be the United States, China, and the European Union. It operates more than fifteen manufacturing plants located in Europe, Turkey, Romania, Egypt, Russia, China, Taiwan, Hong Kong, Australia, and South Africa. Turkey is a country located in the Eurasian continent, although a larger part of the country’s landmass is located in the western part of the Asian continent. It would therefore be logical to refer to both Europe and Asia when conducting an industry analysis. Arcelik AS, in its more than five decades of history as a home appliance and consumer electronics manufacturer, has become the undisputed home appliances industry leader in Turkey, South Africa, and Romania. The company has focused its efforts in Europe (more than in Asia) because that is where a large concentration of its manufacturing plants are; it is also where its international brands have a larger share of the market. In the home appliances and consumer electronics industries across Europe, Arcelik AS currently holds the third spot in terms of revenues, according to a corporate overview and report released by the company in 2014 . The company achieves this through its International Home Appliances Brand BEKO. Technically, it is BEKO that holds the third spot in the two industries mentioned earlier in Europe. It is worth noting, however, that is being considered as the industry and market leader (i.e. holder of the number one spot) in some countries namely Germany, Romania, Ukraine, and Belgium. Germany is a huge market because it is the biggest and most developed economy in the European Union, so holding the top industry position in this market would be a great accomplishment.
There are no ongoing plans for the company to engage in a merging process. This is because of the fact that the company is controlled by Turkey’s largest holdings company, a conglomerate operating in the industrial and services group, Koc Holding. Arcelik AS was founded in 1955 by Vehbi Koc. It has since ten became a market leader in the home appliances and consumer electronics sector.
According to the company’s latest annual report, it currently employs 24, 876 employees, which is a significant increase compared to the only 23,392 people it employed last year. For the latest count, 20,517 are blue collar workers; while the remaining 4,359 are holders of white collar jobs.
The consumer electronics and home appliances industry is in fact a subcomponent of a larger industry-group, the industrial sector. In terms of its contribution to GDP, the entire industrial sector (which Arcelik AS is a part of) represents some 27.08% of Turkey’s entire GDP, second to the Services sector which represents 64.89%, and ahead of the agricultural sector which only represents 8.03%, as per the latest reading done in 2014 .
Financing and Valuation
The company, for the year 2014, according to its latest financial statement, has book a net profit of 220 million Euros. Below is a table that summarizes the company’s performance from the year 2010 to the year 2015, a five year period.
Based on this analysis, it can be inferred that the peak of the company’s net sales and profit performance, both of which can be a good indicator to be used when it comes to measuring a company’s overall operational performance, has been achieved in the year 2012. Since then, the company has experienced a significant decline for the next two years ending in 2014. The company’s assets have, however, grown since 2012, which is a good thing because this shows how the company is spending its capital to improve its capacity to service the demands of the market. However, what is important would still be the bottom line (net profit, sales, and income). One argument that can be raised here is that there simply is not enough demand in the market and so no matter how much the company spends to increase its assets; its sales would remain laggard because there simply is no demand. Another inference that can be made here, specifically from the market value of the company’s equity, is that the company is increasingly becoming reliant on the capital markets to finance its operations and even its capital expenditures. Normally, companies like Arcelik AS would rely on a combination of bank provided debts and follow on offerings to finance its planned expansions, which is evident by the way based on the company’s upward asset value trend. .
Discounted Cash Flow Valuation Analysis
The enterprise value (or total enterprise value) is an alternative to the market capitalization value. It is used to see the value of the company considering all its debts, preferred shares, total cash, and cash equivalents, plus of course its market capitalization. Real time, the company’s Market Capitalization is 12.91 Billion USD; its enterprise value on the other hand is 16.14 Billion USD . Market Capitalization is obtained by multiplying the number of the company’s outstanding common shares to its current stock price. TEV, on the other hand, is simply the sum of the company’s common stock plus the market value of its preferred shares, market value of debt, minority interest, minus cash and investments.
WACC Computation
Formula: WACC= (E/(D+E))xRe+(D/(D+E))xRdx(1-t) where:
Cost of Equity (Re), Total Equity (E) Cost of Debt (Rd), Total Debt (D), Corporate Tax Rate (t).
Using the Formula and quantified variables above, the Weighted Average Cost of Capital for the company would be 5.47%.
Discounted Cash Flow
In terms of its stock price performance or its being undervalued or overvalued, there are many ways to determine this and the proposed way is to base it on the price to earnings ratio. The price to earnings ratio can be obtained by dividing the company’s current stock price by its Earnings per Share. EPS, on the other hand, is obtained by dividing the company’s net income (depends on what year) by its outstanding number of common shares. If one is going to compare Arcelik AS’ latest P/E which is 14.26 based on a current stock price of $19.11 per share, then it can be said that the company is currently overvalued if we are going to use the 5 year P/E average as a basis, which stands at 13.2 (13.2<14.26). Any P/E value lower than 13.2 would be the trigger for the stock to be considered undervalued. Compared to the current S&P 500 P/E, however, which stands at 18.8, the company may appear undervalued. Then again, it depends on the analyst who factors or markets he is going to use in his analysis.
Optional Commentary
When investors make decisions, they always keep in mind the future growth of the company. For large companies like Arcelik AS, growth potential is already very low and downside potential is average to high. This means that for investors looking for large returns, the company may already be out of the choices. In Arcelik AS’ case, the only way to grow significantly and therefore increase its value is to expand on other markets=ones that it has not conquered yet. This would include Asia, Australia, and South America. This way, the company can increase the demand for its products and therefore its bottom line, which is what the concept of investment, is largely about.
References
AS, A. (Arcelik AS). Annual Report 2014. 01-174.
Morning Star. (2016). Arcelik AS. http://financials.morningstar.com/valuation/price-ratio.html?t=ARCLK.
Statista. (2016). Turkey Share of Economic Sectors in the GDP from 2004 to 2014.
The Koc Group. (2015). Arcelik AS Corporate Overview 2014. 01-63.
Yahoo Finance . (2016). Arcelik AS Key Statistics. http://finance.yahoo.com/q/ks?s=ARCLK.IS+Key+Statistics.
