Equity Valuation and Analysis - Mark Moore

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According to Alfred D. Chandler, the author of the book titled Shaping the Industrial Century, Chandler characterizes the chemical manufacturing industry as having “successful chemical firms followed definite "paths of learning" whereby first movers and close followers created entry barriers to would-be rivals by building "integrated learning bases" (or organizational capabilities) which enabled them to develop, produce, distribute, and sell in local and then worldwide markets. Also they followed a "virtuous strategy" of reinvestment of retained earnings and growth through diversification, particularly to utilize "dynamic" scale and scope economies relating to new learning in launching "next generation" products” (wikipedia.org). This industry is characterized has having moderate levels of competition among existing firms, low threat levels of new entrants, substitute products, and bargaining power of buyers while bargaining power of suppliers ranges to levels of low to moderate. Value Chain Analysis Overall Classifications of the Industry To summarize the industry as a whole it can be broken down to the following categories: low to moderate rivalry amongst existing firms, low threat of new entrants, and a low threat of substitutes. In relation to the bargaining power of the buyer and supplier there is a mixture of both low and high bargaining power in this industry. There are several aspects that will now be discussed to support these conclusions. To begin with, the most important factors are a mix of constant research and development in this ever evolving market, high levels of economies of scale and scope, and established distributor relationships. In addition, efficient production, lower input costs, superior products variety, and are the final key factors in this industry. To begin the breakdown of this industries competitive strategy, one must first break it down between cost leadership and product differentiation. It is clear that firms in this industry must compete based on cost leadership; however, differentiation of products is necessary in order to be successful in certain market segments. In most Dow Chemical Analysis Page 26
cases, firms will choose to implement either cost leadership or differentiation of products, but in this industry both strategies are required to be successful. Through the evaluation of the value chain, one can get a better understanding of how firms in this industry are able to turn a profit. In general, this process begins with the supplier to firm relationship. This relationship involves the exchange of goods and services for money. Then the firm turns the raw materials into the final products, which are then sold to other firms or consumers. “Chemicals are used to make a wide variety of consumer goods, as well as thousands inputs to agriculture, manufacturing, construction, and service industries” (www.wikipedia.org). By understanding the value chain, the industry can show the relevance of each strategy implemented, and determine if new strategies must be incorporated. Furthermore, if strategies are not having the desired effect the firm must choose a new approach to combat these issues to maintain their competitive advantage. Competitive strategy “The profitability of a firm is influenced not only by its industry structure, but also by the strategic choices it makes in positioning itself in the industry” (Palepu and Healy). Firms in this industry use the economies of scale and scope, efficient production, lower input costs to strategize in the cost leadership approach. In addition, the use of the differentiation approach is carried out through superior product variety, research and development, and more flexible delivery. In order for firms in the industry to maintain their competitive advantage, they must not only compete through cost leadership. It is vital to their survival that they produce superior products and invest in research and development, so that their competitors do not surpass them. Economies of Scale and Scope Another important factor to consider when evaluating a company is examining the scale of its operations and the scope of the consumer demand. Since the chemical Dow Chemical Analysis Page 27
Page 1 and 2: Equity Valuation and Analysis Frank
Page 3 and 4: Executive Summary Investment Recomm
Page 5 and 6: Accounting Analysis When analyzing
Page 7 and 8: Valuations In determining Dow’s c
Page 9 and 10: in July of 2006. Comparing Dow’s
Page 11 and 12: Dow provides consumers with special
Page 13 and 14: States as well as some smaller area
Page 15 and 16: ample amount of excess capacity. Gi
Page 17 and 18: Market Share within United States 5
Page 19 and 20: It is also important to note that t
Page 21 and 22: First we must consider scale of eco
Page 23 and 24: The bargaining power of buyers can
Page 25: Price sensitivity of suppliers in t
Page 29 and 30: strategy to gain or maintain market
Page 31 and 32: cannot compete on a large scale of
Page 33 and 34: approximately $600-800M/yr. It is t
Page 35 and 36: company with the most innovative, c
Page 37 and 38: identification of accounting polici
Page 39 and 40: Post-Retirement Benefit Plans The c
Page 41 and 42: As seen in previous figures, firms
Page 43 and 44: policies. These variations can acco
Page 45 and 46: certain numbers effecting key succe
Page 47 and 48: Operating leasing is considered a r
Page 49 and 50: transparent view of how a company o
Page 51 and 52: cards. In a perfect sales environme
Page 53 and 54: The inventory turnover is key indic
Page 55 and 56: The Asset Turnover ratio is one way
Page 57 and 58: This ratio is an indication of how
Page 59 and 60: determined that they were easily wi
Page 61 and 62: shown growth approaching just under
Page 63 and 64: inventories within a year; therefor
Page 65 and 66: how efficient a company is in exten
Page 67 and 68: inventory sit on the shelves, the l
Page 69 and 70: Liquidity Overview In the overall s
Page 71 and 72: OPERATING PROFIT MARGIN 2002 2003 2
Page 73 and 74: Net Profit Margin 2002 2003 2004 20
Page 75 and 76: Return on Assets 15% 10% 5% 0% -5%
Page 77 and 78:
interest requirements on debt” (R
Page 79 and 80:
to fall into debt financing and pos
Page 81 and 82:
endeavors and cash flows. In 2006,
Page 83 and 84:
Financial Statement Forecasting Ana
Page 85 and 86:
Income Statement When forecasting t
Page 87 and 88:
Balance Sheet To start on the balan
Page 89 and 90:
To find the forecast for total liab
Page 91 and 92:
Statement of Cash Flows Seeing as c
Page 93 and 94:
Cost of Debt Liabilities Source Int
Page 95 and 96:
acquired at a rate of Ke. These 2 s
Page 97 and 98:
Trailing method divides the given p
Page 99 and 100:
DIVIDEND PPS D/P HUN N/A DD 1.48 48
Page 101 and 102:
EBITDA PPS P/EBITDA HUN 0.7365 18.9
Page 103 and 104:
EBITDA EV EV/EBITDA HUN 0.7365 7.23
Page 105 and 106:
financial statement, and a calculat
Page 107 and 108:
Out of all of the intrinsic valuati
Page 109 and 110:
This sensitivity analysis was used
Page 111 and 112:
fairly valued would be to have a RO
Page 113 and 114:
Net Sales/Cash from sales 2002 2003
Page 115 and 116:
Altman Z-score 2002 2003 2004 2005
Page 117 and 118:
SUMMARY OUTPUT 36 Month Regression
Page 119 and 120:
Page 121 and 122:
Page 123 and 124:
Page 125 and 126:
Page 127 and 128:
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Equity Valuation and Analysis - Mark Moore

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