Introduction
Coca Cola Company
Coca-Cola Company is one of the biggest manufacturing firm which produces soft drinks in the world. It has its operation in more than 200 countries, and it sells around 1.6 billion servings of Coke, Fanta and Sprite in each day. It is an American company and produces carbonated soft drinks sold almost all over the world under the trademark of Coca-Cola.
AT&T Inc.
AT&T is an American multinational company established to deliver telephone service in the United States. At present, it stands as the largest service provider of mobile as well as fixed telephone line. It is the third largest company ever established in Texas and as of May, 2014, AT&T stands as 23rd biggest company of the world. With its three segments namely wireless, wireline and other, AT&T Inc. provides both wireless as well as wireline communication services in most of the part of the world as it is a multinational company.
Intel Corporation
Intel Corporation is an American based multinational company which produces semiconductor chips used in computers, laptops, mobile phones and other electronic devices. Based on the revenue, Intel stands as the world largest semiconductor chip maker and it produces microprocessors for electronic devices. Intel stood in 61st position in the list of world’s valuable brand in 2013. It has now entered into the field of research, and it is researching electric transmission and generation research.
Boeing Co.
Boeing is the one of the largest aircraft manufacturer of the world. It is a leading aircraft manufacturer in both commercial jet as well as military aircraft. It also designs and manufactures missiles, satellites, rotorcraft, information and communication system in advanced form and electronic and defense systems. Boeing has established itself as major service provider to NASA, and it is a major contractor to work in International space station. It has been providing commercial and military jets and aircrafts to more than 150 countries around the world. It exports aircrafts worth billions of dollars and stand as one of the largest exporters of USA.
Ratio Analysis
When we analyse the ratio of Coca-Cola, we can see that it is performing well. The current ratio of the company is 1.13, which is little less than standard, but it is not worst. It is a measure of firm’s ability to meet its short term liabilities using its current assets. Coke is relatively in good short-term financial standing. Its average collection period is more than two months, which means that the company realizes the cash from its sales in about 65 days from the day of sales. This time is more than the average and this will affect company’s balance sheet as the huge amount of unrealized account receivable is seen. This long collection period also increases the fear of bad debts. Asset turnover ratio of 0.53 is very poor. This ratio measures how well the company uses its fixed assets to generate revenue. The asset turnover ratio of 0.53 says that for each dollar invested in fixed asset, the company generates $0.53. So, its assets are poorly utilized. Other ratios like ROE, ROA, ROS and interest coverage ratio are fairly good, and these ratios are above industry average. These ratios shows that company have good earning prospect and is earning fairly high as compared to other firms in the industry. However, its P/E ratio is little high than the industry average. This P/E ratio shows that to earn one dollar, investors need to invest $22.2 for the stock of coke while investors can earn $1 by spending $21.2 in the stocks of similar companies in the industry. To sum up, we can say that coke is in very good position and, it is wise to invest in the stocks of coke.
In the case of AT&T, all the ratios are well enough to show that company is performing well but its current ratio and asset turnover ratio is fairly low. Current ratio of 0.66 might be indication that company might not be able to meet its short-term liabilities using its current assets i.e. the company has only 0.66 dollar in its current assets to meet its each dollar of current liabilities. This low current ratio might pose a threat of liquidity for the company. In addition to that, the asset utilization is very low, and the company generates only $0.47 for each dollar investment in total asset. The company is collecting its receivables in about 36 days while industry average is 38 days. ROA, ROE, and ROS is fairly high as compared to the industry average. The company is generating higher returns from its assets, equity employed and sales than other firms in the industry. Its P/E ratio is about ten which means that an investor spends $10 to earn $1 in company’s stock while other investors in the industry spends $18 to earn $1 in similar stock.
In the case of Intel and Boeing, both the companies are performing well. Ratio analysis of both companies does not show any significant risk in the company. The current ratio is fairly good, and the collection period of both companies is almost same and 25 days are not a long time. Even though the asset turnover is less, there is huge chance to increase their asset utilization and increase the revenue. ROS of both companies is fairly higher than the industry average, and the company is giving fairly good return to its investors for each dollar of sales than other firms in the industry. ROA and ROE of both companies is good and it’s above industry par. TIE ratio of 52.68 and 17.15 of Intel and Boeing shows that both firms are in well position to cover their interest expenses. P/E ratio of Boeing is little high than the industry average, but it is not that high but P/E ratio of Intel is less than that of industry and investors spend less to earn $1 as compared to investors of other firm in the industry.
We now use the dividend distributed by each company form 2010, and using the dividends distribution growth rate, the growth rate is calculated using the formula where growth,
g=D1D01n-1
We assume that dividend growth will be the constant rate for all companies after 2013 i.e. dividend of each company will increase by the growth rate of 2013. Based on this we will now calculate required rate of return and using the growth rate and required rate of return, we calculate the intrinsic value of stock. Once the intrinsic value is calculated using dividend discount model, we then compare the intrinsic value with the closing price of stock on the 31st December, 2013. We use the closing price of 2013 December 31st because using the dividend and growth rate of 2013, we are calculating the intrinsic value of stock for 2014. This consideration makes it easier to compare an intrinsic value of stock with the market price.
Where,
- v0 = the stock price at time 0,
- D0 = the current dividend,
- g = the growth rate in dividends, and
- ks = the required return on the stock, and
- g < r.
The table shows the calculation of required rate of return and intrinsic value of the stock along with the market price of the stock. If we carefully compare the intrinsic value of stock with the market price of the stock, we can see that there is a vast difference between these two values. Market price is larger than intrinsic value by several folds. Market price of stock is seen to be two times its intrinsic value. In this case, the stock price is seen more by several times and all the stocks are overpriced by the market.
Out of all, the stock of Boeing is highly overpriced as compared to other. Intel’s stock is least overpriced among all. Boeing’s sound financial status and its prospects for growth might be the reason for investors paying high for its stock. Intel, being in the microchip industry, faces the risk of technological advancement that might cause its sales of obsolete chip to fall and invest heavily in R&D. This situation might give little or no return to investors, so investors are paying less for its stocks. This fact can be supported by ratio analysis done above. As we can see, the ratios of AT&T and Intel are almost similar to the industry average so, their intrinsic value and market price have less difference. Whereas the ratios of Boeing and Coke are far better than that of the industry average, so investors are paying higher for the stock of these companies.
Intrinsic Value Calculation Using P/E Model
(Source: www.morningstar.com)
In the above table, we can see that the EPS of both Coca Cola and Intel Corp. has reduced over the period of 3 years while EPS of Boeing and AT&T Inc. has increased during the same period. The growth rates of companies listed above could have been positive, negative or even higher, but since we have considered data of only three years, the data is somewhat different and exact figure might be different than calculated value.
In the table below, we have calculated the intrinsic value of stock using P/E model.
After calculating intrinsic value based on P/E method, we can see that the stocks of AT&T Inc. is fairly priced where its intrinsic value is $35.95, and its market price is $35.16. The stock of Boeing and Intel is slightly underpriced as market price is less than the intrinsic value of the stocks while rest of the stock in the portfolio is overpriced as market price is more than the intrinsic value of the stock. Unlike dividend discount model, this method has given fair picture of stock value and stock price as investors base their investment decision mostly on the earning ability of the company rather than what amount has company distributed in the form of dividends.
Calculation of Return, Standard Deviation and CV
Now, we need to calculate the return, range, standard deviation and covariance of the returns. For this, we use ending price of stocks to get the capital appreciation and then add dividend to find the total return of stock. Below is a table showing the detailed calculation. See appendix for calculation
Above table shows that Boeing has provided the highest return to its investors on average while Coca-Cola has provided 2nd highest return on average. Intel has provided return little more than $3 which is almost equal to that of AT&T. But, Boeing have very large standard deviation. This big value of SD shows that there is a higher risk, and the chance of fluctuating return is high so investing in Boeing stock is a riskier investment. AT&T has lowest standard deviation than others even though its return is almost equal to Intel. So, in the portfolio AT&T is the stock with the least risk. Both Boeing and Intel have coefficient of variation more than one which means that to earn one unit of return, investors of Intel, and Boeing have to bear more than one unit of risk. But the investors of Coca-Cola and AT&T can earn 1 unit of risk by bearing risk amount less than 1 unit. In addition to this, both Coke and Intel have standard deviation value of less than 2 so these companies seems to be least risky company to invest. The range of returns of Coca Cola and Intel is far less than that of other two. This higher value of range means that the return is less fluctuating and is less risky for investors.
The risk measures and beta of the stock match more or less perfectly for others except for AT&T. All the measures of risk i.e. beta, SD, and CV shows that Coca Cola is the company with the least risk. Similarly, beta of Boeing shows that it is risky company that is supported by high value of SD and CV. In the case of Intel, it has beta of 0.95 and is relatively lower riskier firm. This fact is still supported by low value of SD. But in the case of AT&T, beta of 1.35 shows that it is very risky company, but the measure of SD and CV show that it is least risky company in the portfolio as both values are less as compared to others. As we have taken the returns in yearly basis and the period is very small, this might have caused a mismatch between the risk measures and the beta. If we had taken the returns in daily basis and considered longer horizon of time, the result would have been more accurate.
Conclusion
If we consider the ratio analysis, we can see that all of the stocks are equally preferable. The ratios of every company are fairly good, and all of the ratios are fairly higher than the industry average. So it becomes difficult for us to take the decision based on the ratio only. So, we need to consider an intrinsic value and price of stock as well as risk of stock to decide in which stock to invest.
Intel stock is comparatively riskier as shown by its beta, SD and CV. It has been providing consistent return with the range of $9. Its stock price is highly overpriced, and the nature of business is also risky. With its negative growth in earning, it is not a good investment decision.
Out of all, Boeing is seen to be the riskiest stock to invest. Even though it has provided high average return, its standard deviation is large, and its CV, as well as beta, is more than 1. Even though it is underpriced and has good earnings growth, it is very risky company to invest as there is a huge fluctuation in return.
Coca cola seems to be good investment alternative as it has lowest beta, and CV. Its standard deviation is also not that big as compared to others. Even though it is overpriced, it have a good prospect of growth. But, its high P/E ratio and negative growth in EPS can be a matter of concern for investors. Even though it has negative growing EPS, it is continuously providing dividend.
Out of all, AT&T Inc. is the best company to invest as it is very safe as shown by the CV and SD measure. AT&T Inc. is also providing regular dividends to its investors. In addition to this, the P/E ratio of AT&T Inc. is much less than that of the industry, and it is almost fairly priced.
So, Coca cola and AT&T Inc. seems to be good investment option.
APPENDIX
References
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