FMA Investment Portfolio
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The document discusses 4 stock picks - GE, PCLN, WWAV, and DIS - for an investment portfolio. It provides overview information on each company's management, advantages, risks, and estimated growth rates. The portfolio recommends buying shares of all 4 stocks weighted at GE 13%, PCLN 50%, WWAV 17%, and DIS 20% based on the growth potential and diversification across industries.
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FMA Investment Portfolio
- 1. Investment Portfolio University of Michigan, Flint Financial Management Association
- 2. Economic Forecast Economy is on an upward trend Economic growth stock market growth
- 3. The Stock Picks… 1. General Electric Co. (GE) Consumer and Energy Industry 2. Priceline Group, Inc. (PCLN) Travel Industry 3. The WhiteWave Foods Company (WWAV) Food Industry 4. Walt Disney Co. (DIS) Entertainment Industry
- 4. General Electric Co. (GE) Management Jeffrey R. Immelt, Chairman of the Board and Chief Executive Officer • Named one of the “World’s Best CEOs” three times by Barron’s • Since serving as CEO, GE has been named “America’s Most Admired Company” and one of “The World’s Most Respected Companies” • Has held several global leadership positions since coming to GE in 1982, including roles in GE's Plastics, Appliances, and Healthcare businesses. • In 1989 he became an officer of GE and joined the GE Capital Board in 1997 • Financial pivot plan for company from 2014 – 2016: 1. Growing EPS each year 2. Achieving 75% of earnings from industrial businesses 3. Returning $50 billion to investors 4. Growing margins and returns. • In 2014, GE’s share performance trailed S&P 500 returns; over the past five years, their total returns grew by 96%.
- 5. General Electric Co. (GE) Advantages Recently rebalanced its portfolio • 75% GE industrials • 25% GE capitol Fair value is higher than GE’s stock price Oil and gas sector wont have as much of an effect because of their diversification Earnings estimate = 5% - 8% growth Risks Weakening oil prices may negatively affect the company’s oil and gas segment Diversified Conglomerate
- 6. Priceline Group, Inc. (PCLN) Management Darren Huston, President & CEO • Became CEO in 2014. • Previous CEO of Booking.com. Jeffery Boyd, Former CEO & Present Chairman of the Board. • CEO from 2001-2013. • Made major acquisitions such as Booking.com and Agonda. • Built Priceline into what it is today.
- 7. Priceline Group, Inc. (PCLN) Advantages Lower oil prices cause the price of airfare to decrease, resulting in more people willing to travel and use their products/services Fair value is higher than PCLN’s stock price Growth in industry because of low oil prices Earnings estimate = 16% - 23% growth Forecasted stock price = $1206 per share $53 (4.62%) growth per share Risks Receives much of its revenue from international markets • Exposes company to foreign exchange rate fluctuations Provider of online travel and travel related reservations “The biggest travel trend for 2015 will be the continuing decline of the price of oil. This is going to have a very big impact on the travelers– in a good way.” -Dan Wasiolek
- 8. The WhiteWave Foods Company (WWAV) Management Greg L. Engles Chairman of the Board of Directors and Chief Executive Officer • Chief Executive Officer of Dean Foods Company, a leading beverage company and former parent company of WhiteWave from 1994-2012 • WhiteWave has been the fastest growing food company in the U.S. for the past four years under Engles. • Delivered year-over-year adjusted earnings per share growth of 36%, excluding investments in their China joint venture, and meeting or exceeding quarterly earnings guidance in every quarter • Provided oversight to the merger and acquisition strategy resulting in the acquisition and integration of Earthbound Farm and So Delicious Dairy Free, and the successful execution of the China joint venture with China Mengniu Dairy Company Limited
- 9. The WhiteWave Foods Company (WWAV) Advantages Walmart sells Horizon WhiteWave products Organic foods • Organic foods industry expect a 16% growth by 2020 Earnings estimate = 16% - 24% growth Risks More companies can rise to make organic foods • More competition Organic foods are currently in, but it has the possibility to fall through. Consumer packaged food and beverage company. Manufactures plant-based foods and beverages.
- 10. Walt Disney Co. (DIS) Management Robert A Iger, Chairman of the Board and CEO • His strategic vision focuses on three fundamental pillars 1. Generating the best creative content possible 2. Fostering innovation and utilizing the latest technology 3. Expanding into new markets around the world • Iger has built on Disney’s rich history of unforgettable acquisitions • Iger has made Disney an industry leader • Iger has many awards 1. Fortune Magazine’s “25 Most Powerful People in Business (2006, 2007) 2. Institutional Investor Magazine “Best CEOs” (2008,09,10,11) 3. Chief Executive Magazine “CEO of the Year” (2014)
- 11. Walt Disney Co. (DIS) Advantages Movie line-up for 2016 Upcoming season for tourists and vacationers Upcoming opening of a DisneyLand in Shanghai Overvalued in the short-term, but in the long- term will even out Earnings estimate = 13% - 16% growth Risks Failed movies Evolution of television/changing media A media conglomerate which include media networks, ESPN, ABC, parks, branded business, entertainment and consumer products.
- 12. Estimated growth is 2.54% 2012 2013 2014 2015 Net Income $13,641,000 $13,057,000 $15,233,000 $15,620,618 Total Assets $684,999,000 $656,560,000 $648,349,000 $664,846,907 Total Liabilities $561,973,000 $525,994,000 $529,190,000 $526,983,713 Total Stockholders’ Equity $123,026,000 $130,566,000 $128,159,000 $137,863,194 2015 Forecast GE
- 13. 2015 Forecast PCLN Estimated growth is 10.28% 2012 2013 2014 2015 Net Income $1,419,566 $1,892,663 $2,421,753 $2,670,765 Total Assets $6,569,742 $10,444,460 $14,940,563 $16,476,797 Total Liabilities $2,512,480 $3,534,731 $6,373,869 $6,465,833 Total Stockholders’ Equity $3,896,975 $6,909,729 $8,566,694 $10,010,964
- 14. Estimated growth is 9.99% 2012 2013 2014 2015 Net Income $113,694 $99,041 $140,185 $155,292 Total Assets $2,168,011 $2,283,184 $3,372,841 $3,709,865 Total Liabilities $1,383,055 $1,321,745 $2,296,354 $2,560,870 Total Stockholders’ Equity $784,956 $961,439 $1,076,487 $1,148,995 2015 Forecast WWAV
- 15. Estimated growth is 7.06% 2012 2013 2014 2015 Net Income $5,682,000 $6,136,000 $7,501,000 $8,107,837 Total Assets $74,898,000 $81,241,000 $84,186,000 $90,130,915 Total Liabilities $35,139,000 $35,812,000 $39,228,000 $40,950,194 Total Stockholders’ Equity $39,759,000 $45,429,000 $44,958,000 $49,180,721 2015 Forecast DIS
- 16. Risk Analysis GE DIS WWAVPCLN S&P 500
- 17. Conclusion We recommend that we buy the stocks Weights: • GE – 13% • PCLN – 50% • WWAV – 17% • DIS – 20%
- 18. Sources Morningstar Direct Software http://finance.yahoo.com/ http://www.priceline.com/?refid=PLGOOGLECPC&refclickid=D%3AcBrand10776764420g3302007 2412&gclid=CM6isZDWmcUCFQGNaQodTIEAbg&query=priceline&kw=priceline&match=e&adp=1 t1 http://www.whitewave.com/ https://disneyworld.disney.go.com/special-offers/stay-dine/?CMP=KNC- WDW15_Q3FreeDine_BR|G|4151300.RR.AM.02.01.OF.Q3FreeDine&keyword_id=sAzch1pRn_dc| waltdisney|43157953780|p|1540wwa14043 http://www.ge.com/ http://www.bls.gov/
Editor's Notes
- Jeffrey R. Immelt, Chairman of the Board and Chief Executive Officer Named one of the “World’s Best CEOs” three times by Barron’s Since serving as CEO, GE has been named “America’s Most Admired Company” by a poll conducted by Fortune magazine and one of “The World’s Most Respected Companies” in pools by Barron’s and the Financial Times Has held several global leadership positions since coming to GE in 1982, including roles in GE's Plastics, Appliances, and Healthcare businesses. In 1989 he became an officer of GE and joined the GE Capital Board in 1997 Financial pivot plan for company from 2014 – 2016: 1.Growing EPS (earnings per share) each year 2.Achieving 75% of earnings from industrial businesses 3.Returning $50 billion to investors 4.Growing margins and returns. In 2014, GE’s share performance trailed S&P 500 returns; over the past five years, their total returns grew by 96%. From 2014 to 2016, we are focused on delivering an important financial pivot. This includes: growing EPS each year; achieving 75% of our earnings from industrial businesses; returning $50 billion to investors; and growing margins and returns. In 2014, our share performance trailed S&P 500 returns; over the past five years, our total returns grew by 96%. 2014 May – announced an agreement for the acquisition of Alstom’s Power & Grid business, the largest in GE’s history. This highly strategic investment brings complementary products and services in power and greatly strengthens GE’s position in the grid sector. July – began the spinoff of Synchrony Financial, GE’s Retail Finance business. GE still owns 85% of this new company, currently valued at $26 billion. By the end of 2015, the company expects to spin this company to GE investors in a capital-efficient exchange for about 8% of our shares outstanding. September – announced the sale of our Appliances business to Electrolux for $3.3 billion, a good price which will generate a pretax gain of more than $1 billion; business did not fit the company’s core strengths, nor was our competitive enough. Believe that the capital can best be deployed elsewhere. Have completed more than $100 billion of acquisitions and dispositions. This includes major investments to strengthen our infrastructure portfolio, substantially reducing financial services and selling businesses where we lacked competitive advantage.. Company structure Diversified leadership in markets where they are in Competitive advantage; horizontal capability in technology, growth markets, services, lean structure Leadership in industrial internet Value creation; operational execution, focused on costs and returns, and linked to compensation Unified team; united by a culture of simplification Innovations. 2014 – launched two products that will generate $100 billion of revenue over their life. The CFM LEAP™ jet engine Will power the next generation of narrow-body aircraft and is 15% more fuel-efficient than the engine it replaces Since launch, we have captured 79% market share, and LEAP is the fastest-growing engine in our history The H turbine A technological marvel the largest, most fuel-efficient gas turbine in the world Will save our customers $8 billion per year on fuel. It is on pace to be one of our most successful gas turbine launches in history. Learning and Development They invest $1 billion in learning and development each year Train 40,000 employees in Crotonville courses each year. Around the world, they offer “capability building” to countries where we invest, as an additional benefit to a “GE job.” Train customer executives, invest in schools, develop small business and bring higher standards. Future Goals Hit 17% margins and returns by 2016 Over the last few years, have made substantial progress on structural cost, reducing it by $4 billion to a world-class level Next wave of improvement will be targeting product cost, segment gross margins and returns GE has approximately a $100 billion cost base, 70% of which are direct product and service costs “segment gross margins,” the revenue in excess of these costs, are 27% Aim is to grow this by 100-200 basis points over the next few years. Reduce product cost For the H Turbine, our goal is a 25% reduction from present levels. Requires automation, accelerating learning curves from our supplier and new manufacturing tools. It will also result in the insourcing of critical components like precision castings. Short-term tradeoffs to achieve long-term gains through 2015 and 2016 Gave up 15% of Synchrony’s earnings through the IPO (initial public offering), but investors have yet to feel the benefit of the stock split. Invested $0.12 EPS to restructure the Company which was a 5% drag on earnings and lowered returns in 2014. Expect to grow EPS (earnings per share) each year Industrial earnings should expand by more than 10% while Capital shrinks dramatically Expect industrial earnings to be 75% of the total by 2016 and to return $50 billion in dividends and buyback to achieve higher margins and returns over the period. Cultural change Redefining the way decisions are made, the way the team works together and aligns with the customers. Simplification leaner management structure; slim structure that can leverage scale Run the Company with smaller headquarters, fewer processes and shared services Launched a process called “FastWorks” which is based on the entrepreneurial spirit of Silicon Valley; creates shorter product cycles, quicker IT implementation, and faster customer response than any competitors. Changed incentive compensation plan for senior leaders Old plan was tied to results new plan keeps everyone focused on the company’s achievement of investor commitments, targeting the key financial and strategic metrics in their businesses that drive company success. Encourages a “team… work together, win together” attitude. Keep sight of the company’s values with new and innovative infrastructure.
- Recently rebalanced its portfolio GE strategy; portfolio goal for 2016 based off CEO’s letter to the shareholders 75% GE industrials 25% GE capitol Planning to sell all of the GE capital within the next 2 years and use the money to do a $50 billion dollar buyback program More stable selling off their capital More invested into financial side than what they started Fair value is higher than GE’s stock price Think that GE is undervalued so it’s a good time to buy the stock now. When market corrects itself, then we will make money on it. Oil and gas sector wont have as much of an effect because of their diversification Based on the recent decreasing prices of oil 7 different businesses in their industrial segment: power and water, oil and gas, energy management, aviation, health care, transportation, and lighting Areas of focus will remain middle-market commercial and industrial loans, as well as equipment and aircraft leasing Morningstar Earnings estimate = 5% - 8% growth MorningStar
- --Darren Huston assumed the CEO position at Priceline in early 2014, following Jeffery Boyd's tenure as CEO from 2001 to 2013. Huston had been CEO of the Booking.com division, which generates the majority of the company's revenue and cash flow. Boyd continues to serve as chairman of the board. When Boyd took over as CEO in 2001, the company primarily consisted of Priceline.com in the United States and an opaque Name Your Own Price service that appealed to budget travelers. Boyd saw the massive opportunity in international markets and acquired Booking.com in 2004 for only $135 million and Agoda in 2007. With our stand-alone valuation for Booking.com at over $70 billion, the acquisition is one of the most successful acquisitions of a foreign company by an American company in the past 50 years. In 2014, Gillian Tans was promoted from COO of Booking.com to president and COO of Booking.com. Tans has been with Priceline since 2002 and has been COO at Booking.com since 2011, so we don't see any change to our Exemplary Stewardship Rating as a result of this promotion. In fact, we are encouraged that this promotion will allow Huston time to work on talent and long-term strategic planning. The company has bought back more than $1.2 billion in stock in the past three years for an average price well below our fair value estimate, and in February the board authorized a $3 billion repurchase program. Priceline’s stock price has increased to more than 52 times the stock price at the end of 2001, and we view equity stewardship as exemplary. The primary risk we see to this rating is from significant value-destroying acquisitions; for instance, although the purchase of OpenTable should offer moat-enhancing effects and is relatively small versus Priceline's total business, we view the purchase price as relatively expensive. -Companies that already have the customer traffic and budgets to replicate the network Priceline has built pose the main risk. Focused entry from Google, Facebook, Amazon, and others could double the current handful of players that have dominant scale, leading to commodification of the industry and a meaningful impact to profitability. That said, replicating Priceline’s network requires significant time and expense. For instance, Google’s Hotel Finder has not gained traction, as evidenced by its 100 thousand-500 thousand mobile app downloads versus Priceline’s Booking.com app downloads of 50 million-100 million. -Priceline is the world’s largest online travel agency, offering booking services for hotel rooms, airline tickets, rental cars, restaurant reservations, cruises, and other vacation packages. The company operates a number of branded travel booking sites, including Priceline.com, Booking.com, Agoda, OpenTable, and Rentalcars.com, and has expanded into travel media with the acquisition of Kayak. Transaction fees for online bookings account for the bulk of revenue and profits. -Priceline announced April 21 that it is adjusting its rate parity clause on Booking.com in Europe in order to support the recent decisions by the national competition authorities in France, Italy, and Sweden. We see this as a smart pre-emptive move as other competition authorities in Europe continue to review the rate parity topic. We see the impact to Priceline as negligible at this time and are not making any changes to our narrow moat rating or $1,860 fair value estimate. We will look for additional commentary during Priceline's earnings conference call May 7. -The company previously held a rate parity clause that prohibited a hotel that contracted rooms with Priceline to offer the same rooms for a lower price on either its website or other online travel agency websites. The updated clause now allows a hotel the opportunity to offer these rooms at different prices and terms to different OTAs, but still prohibits the hotelier from offering the rooms at a lower price on its website versus the price negotiated with Priceline. -The ability for hotels to offer different prices on different OTAs opens up the opportunity for hotels to negotiate more competitive rates with Priceline -we believe the reality is that Priceline's distribution reach and network effect advantage are significantly stronger than the competition, and hoteliers are going to want to continue to place inventory where unique visitation is the highest -We expect Priceline’s global online travel agency leadership position to expand over the next decade at a much faster rate than that of primary competitor Expedia, driven by a superior position in China, continued leadership in Europe, and expanding presence in the U.S. We see the firm's global share of online bookings reaching high single digits in 2019 from 3.7% in 2013. -Priceline has built a leading network of hotel properties and other services, which drives an increasing user base. We see this network effect continuing to expand in both developed and emerging markets. In developed markets, the successful "booking.yeah" TV campaign has helped drive improving U.S. bookings growth, while in Europe replicating Priceline’s leading network is proving costly and challenging, as boutique hotels (a substantial portion of the region’s market) that are already signed with Priceline face labor and expense constraints in joining multiple distribution channels. In emerging markets, the firm is expanding its leadership in China with its Ctrip partnership, which is crucial, as we see China representing 28% of total industry online bookings growth over the next decade. In addition, the recent acquisitions of Kayak and OpenTable extend the network globally. -This expanding network positions Priceline well for the increasing global shift to booking via mobile applications. Booking.com is a top-five travel application in 28 markets around the world, while Expedia ranks second among online travel agencies and is ranked in three markets as a top-five travel application. -Priceline derives the vast majority of its revenue from international markets. This exposes the company to foreign exchange rate fluctuations that are often near term in nature, yet can meaningfully affect sales and profitability. For example, we expect a currency impact to bookings of high single digits during 2015 -We see Priceline as having a narrow moat driven by its sustainable network effect in the online travel industry. Priceline established its moat with the Booking.com acquisition in 2005. Using its size, Priceline was able to increase spending to promote Booking.com to both hoteliers and travelers. For travelers, Booking.com was intriguing because it offered agency bookings, which allowed them to pay after a hotel visit versus having to pay up front with merchant bookings. This helped drive increased customer traffic (the demand side of the network effect equation), which in turn drove hotel inventory to the website (the supply side of the network effect equation). This created a positive virtuous cycle at a time when no other competitor had begun to build scale in Europe; customers joined and hoteliers joined, which drove further hotel inventory and customer traffic. -At year-end 2014, Priceline had 600,000 properties on its network (not including 170,000 for Ctrip as of the third quarter of 2014). The other two large online travel agency players, Expedia and Orbitz, are planning to merge with one another and when combined stand to have 317,000 properties (217,000 for Expedia not including eLong and 100,000 for Orbitz). On the demand side, Priceline’s May 2014 worldwide monthly unique visitor traffic was 80 million versus Expedia's and Orbitz's unique visitor traffic of 63 million and 10 million, respectively, as measured by ComScore. Also on the demand side, customers booked 78 million room nights through Priceline brands versus 47.3 million on Expedia brands in the most recent quarter. -That said, we expect the market to support some level of increased competition over the next several years, and we currently see Priceline has having the strongest network. The travel booking market remains large at $1.1 trillion, and online penetration of the travel market remains low at 38%. - Morningstar fair value estimate to $1,860 from $1,822
- Lower oil prices cause the price of airfare to decrease, resulting in more people willing to travel and use their products/services The biggest travel trend for 2015 will be the continuing decline of the price of oil. This is going to have a very big impact on the travelers– in a good way. Airlines will be under less pressure to raise fares, and will likely begin to add back some of the flights that were cut in recent years. Lower gasoline prices will free up some extra cash in the travel budgets of road warriors, which means they’ll have a bit more to pay for nicer hotels, better meals and more technology. Of course, there will be a downside– the boom in oil producing regions of the US and Canada could see a slowdown. Forecasted Stock Price =60754000000/1152.7 = 52705821.12 : number of shares outstanding/current stock price =(2422000000*1.16) = 2809520000 : income*growth 2809520000/52705821.12 = 53.305 53.305/1152.7 = 4.62% 53.305+1152.7 = $1206
- Robert A. Iger – Chairman and Chief Executive Officer Management Team His strategic vision for The Walt Disney Company focuses on three fundamental pillars: 1) generating the best creative content possible; 2) fostering innovation and utilizing the latest technology; and 3) expanding into new markets around the world. Iger has built on Disney’s rich history of unforgettable acquisitions with Pixar (2006), Marval (2009), and Lucasfilm (2012)—three of the entertainment industry’s greatest storytelling companies. Iger has made Disney an industry leader through its creative content offerings across new and multiple platforms. Iger has gotten many of awards—Fortune Magazine’s “25 Most Powerful People in Business” (2006,2007); Institutional Investor Magazine “Best CEOs” (2008,2009,2010,2011); Chief Executive Magazine “CEO of the Year” (2014), etc. Now I’m going to talk about the Letter of the Shareholders written by Robert A. Iger Disney has delivered some of the world’s most extraordinary entertainment experiences as well as significant growth and a total shareholder return of 317%. Disney has reached a sustained level of success focusing on three strategic priorities Unparalleled creativity With their unparalleled pipeline of global franchises and branded content from Disney, Pixar, Marvel, Star Wars, ABC, and ESPN, they are very diversified in the media/entertainment industry Innovative technology From tools giving artists the ability to individually animate thousands of unique snow crystals in Frozen to MagicBands* that change how millions of guests experience Disney World. Almost 10 million guests have sported their MagicBands Global expansion Opening up Shanghai Disney Resort and expansion in Orlando Not to mention they have Walt Disney World Resort in Orlando, Tokyo Disney Resort, Disneyland Paris, Hong Kong Disneyland Resort, and Disneyland Park in California *MagicBand info - Your MagicBand enables you to travel lighter throughout your vacation. Use it to enter the parks, unlock your Disney Resort hotel room and buy food and merchandise. Plus, your MagicBand gives you FastPass access to all the experiences you’ve selected online. All this is used by a touchpoint with a pin number. Their motto for this is “they just work—like magic!” Risk Analysis Risk Analysis spreadsheet that I calculated myself. As you can see, expected return, variance, and standard deviation for all companies. I then went on to calculate Covariance, Correlation, Beta, Alpha and here’s the riskfree rate. Correlation and Beta are the two important numbers to look at when creating the portfolio… For all companies correlation is less than 1, so it’s not perfectly correlated which means we have better opportunity for return and more diversified portfolio. And Beta is a measure of volatility of our securities in comparison to the market (S&P500). So as you can see, the numbers are pretty self-explanatory, this is how much we’ll gain or lose when the market goes up or down. This table here shows how I was able to rank the businesses after calculating excess return over beta WWAV is ranked first, Priceline second, Disney third, and GE fourth I calculated a cut off point for each securities and clearly the optimal portfolio is the first three, WhiteWave, Priceline, and Disney. HOWEVER, just because GE didn’t calculate into the optimal portfolio doesn’t mean you shouldn’t invest into the company. The cutoff point is considered a “good rule of thumb” when considering particular securities, but the cutoff point is very subjective as well and will be based on personal characteristics of us as investors and we feel GE is still a good pick considering what Devon talked about and what analyst have said about the company. (Analyst is from Morningstar) The weights I calculated are just from the three securities in the optimal portfolio. The weights say that we should invest this amount of money in percentages. Although, we do plan on adding GE.
- Basic pay-television service rates have continued to increase, which could cause consumers to cancel their subscriptions or reduce their level of service ESPN garners the highest affiliate fees of any basic cable channel and a decrease in pay-TV penetration would slow down revenue growth.