The Setting: You are employed as a Financial Analyst for the private equity firm Celash, Byrne &Moovon. They are considering approaching either the management of Company A or Company B (choose from the list below) to discuss with management their possible interest in selling out to CB&M. You have been asked to do a comprehensive analysis and evaluation of both companies and make a recommendation as to which of the two is the most desirable acquisition and at what price. You report directly to Mr. Moovon (pronounced “move on”). He is not a patient person and has a low tolerance for waffling and indecision. You have less than two months to complete the task and he will expect frequent updates. You can also expect that he will interrupt you with other projects. (Welcome to the real world.)
Choose one of these pairs of companies to compare. Choose one company from column A and the company immediately to its right in column B.
J. C. Penney (JCP)
Valero Energy (VLO)
Your Tools Are:
a. The course textbook, especially Chapters 3, 17, 18 and 19.
b. The supplemental text The Interpretation of Financial Statements, Benjamin Graham.
c. Detailed Financial Statements for your companies are filed with the Securities and Exchange Commission and available on the company web sites.
d. The Value Line Investment Survey (available online from the Columbia College Library.
e. Your imagination and creativity.
What Your Will Report Look Like: He is not going to weigh your report, but a good guess would be that he would be disappointed if the final submission was less than 15 to 20 pages and 2-3000 words of explanation.
What is Expected: A detailed comparison of the two companies using all of the relevant ratios and the calculations involved. The ratios should be accompanied by text explaining what each means and why they differ between the two companies. Chapter 3 of the Text and Part Two of the Graham book will be a help here.
You will not get away with data for one year. Here is his minimum expectation of ratios to be analyzed and explained. In each case he wants to see five years of data. He doesn’t want to hear you can’t find five years of data.
Mr. Moovon expects you to begin with the Balance Sheet.
Now move on to the Income Statement.
1. Are the companies as profitable as they should be? What ratios would tell us that? OK! Now calculate them. Let’s see those Efficiency Ratios.
2. Now that you have calculated the ratios, what can CB&M do to make them more profitable? What do you suggest?
Not all of the ratios will apply to all of the companies. For instance, Sales per Square Foot is important in Retailing but meaningless for a Manufacturer or an online Search Engine.
As a double check let’s run a DuPont Analysis on both companies. Mr. Moovon will be disappointed if you leave that out.
Put a value on both companies. Calculate some valuation ratios like Price/Book Value, Price/Earnings Per Share (make sure you use fully diluted share numbers), Price/EBITDA Per Share. If you chose JCP and TGR, how do these ratios compare with some other retail operations? You might want to compare these companies to others in their field or to some big box retailers. What is the current market value (debt and equity) of each of your two companies? Mr. Moovon will need to know this to formulate a reasonable bid (or walk away).
Let’s impress Mr. Moovon.
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