student project sample

Stock analysis project on S&P 500 1

Sample 1

Abstract

This project paper researches the stock market based on data of S&P 500. The main

theme is around book value, market value, and their association.

To measure the association of book value and market value, we use three methods. While

MV/BV ratio and ranking method measure the association between book value and market

value of a company, correlation coefficient measures the correlation of book value and

market value of a range of companies.

After that, we will analyze four companies that have special relations between book value

and market value.


Table of contents

Abstract................................................................................................................................1

Table of contents................................................................................................................2

List of Tables.......................................................................................................................4

List of Figures.....................................................................................................................4

1. Introduction..................................................................................................................1

2. Literature review..........................................................................................................1

3. Data of analysis............................................................................................................3

4. Statistical analysis.......................................................................................................4

4.1 MV/BV ratio................................................................................................................4

4.2 Correlation coefficient.................................................................................................6

4.3 Ranking method.........................................................................................................7

4.4 Conclusion about association of BV and MV...........................................................10

5. Further analysis on special cases...........................................................................11

5.1 Avon Products, Inc...................................................................................................12

a. Introduction...........................................................................................................12

b. Operating activities...............................................................................................12

c. Investing activities.................................................................................................14

d. Financing activities...............................................................................................15

e. Analysis................................................................................................................16

5.2 Providian Financial, Co............................................................................................17

a. Introduction:..........................................................................................................17





e. Analysis................................................................................................................19

5.3 Gap, Inc....................................................................................................................20

a. Introduction...........................................................................................................20




e. Analysis................................................................................................................22

5.4 Crown Cork & Seal Company, Inc...........................................................................23

a. Introduction...........................................................................................................23

b. Analysis................................................................................................................24

6. Lessons learnt from the project...............................................................................27

Reference...........................................................................................................................28


List of Tables

Table 4.1: Histogram table of MV/BV....................................................................................5

Table 4.2: The correlation between BV and MV for each industry and the whole................6

Table 4.3: List of show-on companies..................................................................................8

Table 4.4: List of typical show-off companies (show < -4 or show > 4)................................9

Table 4.5: Distribution of show values..................................................................................9

List of Figures

Figure 2.1: Book value, intrinsic value, and market value.....................................................3

Figure 4.1: Histogram of MV/BV...........................................................................................5

Figure 4.2: Correlation of MV and BV...................................................................................7

Figure 4.3: Distribution of show values...............................................................................10


1. Introduction

In Vietnam, there are some companies undergoing equitization of their ownership. This is

a signal for establishing the stock market in Vietnam. As there is no stock market, a

company is evaluated by its book value. Nowadays, the notion of market value of a

company becomes more familiar to Vietnamese. However, there is an ambiguity between

two concepts - book value and market value. Since the stock market in Vietnam has not

been established completely, we use the data from S&P 500 to illustrate our methodology.

In this project paper, we will

Clarify these two concepts theoretically.

Establish some practical methods (using computer) to measure the association

between market value and book value.

Analyze the reasons why there is low association between book value and market

value of some companies.

2. Literature review(*)

Before giving definitions of book value and market value, it is necessary to clarify two

terms: liquidation value and going-concern value. Liquidation value is the amount of

money that could be realized if an asset or group of assets (or a firm) is sold separately

from its operation organization. Going-concern value of a firm is the amount the firm could

be sold for as a continuing operation business. These two values are rarely equal, and

sometimes a company is actually worth dead than alive.

The book value (BV) of an asset is the accounting value of the asset (the asset’s cost

minus its accumulated depreciation). The book value of the firm, on the other hand, is

(*) All definitions in this section are in Van Horne, J. and Wachowicz, J., 1998, Fundamentals of

Financial Management, Prentice Hall, New Jersey.


equal to the dollar difference between the firm’s total asset and its liabilities and preferred

stock listed on its balance sheet. It based on historical values.

The market value (MV) of an asset is simply the market price at which the asset (or a

similar asset) trades in an open marketplace. For a firm, market value is often viewed as

being the higher of the firm’s liquidation or going-concern value.

Book value is the historical cost, in contrast market value is the price you can buy and sell

in the market. To understand more about these two terms, we clarify another term -intrinsic

value. The intrinsic value of a security is what the price of a security should be if properly

price based on all factors bearing on evaluation (asset, earning, future prospects,

management, etc). It is the present value of the cash-flow stream provided to the investor,

discounted at a required rate of return appropriate for the risk involved. In short, the

intrinsic value of a security is its economic value. If markets are reasonably efficient and

informed, the current market price of a security should fluctuate around its intrinsic value.

Relatively, we can figure out the relation of book value, intrinsic value, and market value as

in figure 2.1.

To understand the expectation of the relation between book value and market value, we

stand on two points of view, the investors and the company.

The investors: maximize their benefit. The market value is what they can earn when

they sell the asset. Therefore, they expect to maximize the market value.

The company: maximize wealth of shareholders.

The more the market value exceeds the book value, the better for the investors and the

company. Hence, the market value is expected to exceed the book value.


Figure 2.1: Book value, intrinsic value, and market value.

3. Data of analysis

All the data in this project is collected from “Business Week’s Industry Rankings of the

S&P 500” in business week / march 29, 1999. The S&P 500 represents a huge universe,

accounting for some 70% of the market of all U.S stocks (they are ranked within industry

groups). It form a vivid picture of how well each company harnesses its resources, given

the unique constraints of its industry. Because Business Week is owned by McGraw-Hill,

the S&P 500 scoreboard does not include a forecast of the company’s earnings. Data

compiled by Standard & Poor’s Compustat, a division of the McGraw-Hill companies, from

source such as statistical services, registration statement, and company reports. In our

analysis, preferred stocks will be ignored because the source of data can not provide us

the information about them.

Intrinsic value

Market value v

Time

$

Book value


This analysis covers 112 companies in 8 industries:

Aerospace & Defense: 6 companies.

Automotive: 7 companies.

Banks: 34 companies.

Chemicals: 14 companies.

Conglomerates: 10 companies.

Consumer products: 28 companies.

Containers & Packaging: 6 companies.

Discount & Fashion retailing: 7 companies.

4. Statistical analysis

Subjectively, book value and market value of a company should be equal or at least have

a clear association because they are the value of the company. But in practice, it is

different. The association between market value and book value of companies different

from industries to industries, from companies to companies. There are three common

methods for measuring the association between book value and market value: MV/BV

ratio, correlation coefficient, and ranking method.

4.1 MV/BV ratio

MV/BV ratio represents the relative difference between market value and book value of

one company. If MV/BV equals 1, market value will equal book value. If MV/BV is more

than 1, market value will exceed book value and vice versa. The ratios of all companies

are presented in appendix B.


Table 4.1: Histogram table of MV/BV

Bin Frequency Cumulative %

0.87 1 .89%

4.62 75 67.86%

8.36 19 84.82%

12.11 12 95.54%

15.85 1 96.43%

19.60 1 97.32%

23.35 1 98.21%

27.09 1 99.11%

30.84 0 99.11%

34.58 0 99.11%

More 1 100.00%

Figure 4.1: Histogram of MV/BV


There are some findings in our analysis:

The average of MV/BV is 4.83

The most frequently ratios are from 0.88 to 4.62 (75 times, 67.86%)

Almost companies (95.54%) have MV/BV not more than 12.11

Only 1 company has MV/BV less than 1

The company has lowest MV/BV is CROWN CORK & SEAL (0.87)

The company has highest MV/BV is AVON PRODUCTS (38.33)

4.2 Correlation coefficient

Correlation coefficient of market value and book value represents the association between

market value and book value of a rank of companies (all of companies or each industry).

The nearer 1 the correlation coefficient (from 0 to 1) is, the tighter the MV and BV of these

companies relate together (linear). Refer to appendix C.

Table 4.2: The correlation between BV and MV for each industry and the whole

Correlation THE WHOLE 0.7721 AEROSPACE & DEFENSE 0.859

2 AUTOMOTIVE 0.993

3 BANKS 0.974

4 CHEMICALS 0.953

5 CONGLOMERATES 0.998

6 CONSUMER PRODUCTS 0.724

7 CONTAINERS & PACKAGING 0.250

8 DISCOUNT & FASHION RETAILING 0.981


Figure 4.2: Correlation of MV and BV


The correlation coefficient between MV and BV of these companies is 0.772.

The industry has highest coefficient is Automotive (0.993). The relative association

between MV and BV is nearly linear.

The industry has lowest coefficient is Containers & Packaging (0.25).

4.3 Ranking method

After ranking these company by MV (refer to appendix D) and BV (refer to appendix E), we

compare two ranking and show the status of these companies (refer to appendix F). A

show-on (show = 0) company is the company appearing in the same ordered 10-company

group of two rankings. A positive show-off (show > 0) company is the company appearing

in the ordered 10-company group of MV ranking higher than BV ranking and vice versa.

Table 4.3: List of show-on companiesI(*) COMPANY

(*) Industry number


3 29 242 BANKAMERICA5 1 44 GENERAL ELECTRIC3 14 104 CHASE MANHATTAN2 1 26 FORD MOTOR8 4 35 WAL-MART STORES3 7 72 BANK ONE6 14 218 PHILIP MORRIS1 4 207 BOEING4 4 311 DUPONT4 5 325 DOW CHEMICAL3 11 83 NATIONAL CITY3 4 57 U.S. BANCORP3 21 138 BANK OF NEW WORK5 2 162 ALLIEDSIGNAL3 10 82 MELLON BANK5 3 203 TEXTRON4 1 239 AIR PRODUCT &CHEMICAL6 8 164 COCA-COLA ENTERPRISES3 28 224 HUNTINTON BANCSHARES6 11 180 VF6 16 238 CIRCUIT CITY GROUP4 2 248 ROHM&HAAS3 19 125 AMSHOUTH BANKCORPORATION4 6 366 INTERNALTIONAL FLAVORS &FRGRANCIES5 6 323 HARCOURT GENERAL2 2 29 NAVISTAR INTERNATIONAL5 7 348 PALL6 13 201 ADOLPH COORS7 3 357 BEMIS6 23 426 FRUIT OF THE LOOM6 19 326 ALBERTO-CULVER5 5 272 EG&G

Table 4.4: List of typical show-off companies (show < -4 or show > 4)I(*) COMPANY Show

7 6 415 CROWN CORK & SEAL -53 32 370 REPUBLIC NEW YORK -58 1 3 GAP 63 INC INC PROVIDIAN FINANCIAL 56 15 222 AVON PRODUCTS 7

(*) Industry number


Table 4.5: Distribution of show valuesShow Frequently %

-5 2 1.79%-4 2 1.79%-3 4 3.57%-2 13 11.61%-1 23 20.54%0 32 28.57%1 18 16.07%2 6 5.36%3 5 4.46%4 4 3.57%5 1 0.89%6 1 0.89%7 1 0.89%

Figure 4.3: Distribution of show values


The most frequently show value is 0 ( 32 times, 28.57%)

Almost companies (82.15%) have show values from –2 to 2.


The highest show value is 7 (Avon Products)

The lowest show value is –5 (Crown Cork & Seal and Republic New York)

4.4 Conclusion about association of BV and MV

We mention about three methods to measure the association between MV and BV in this

paper. While MV/BV ratio and ranking method measure the association between MV and

BV of each company, correlation coefficient measure the correlation between MV and BV

of a range of companies. After analysis, we can conclude that the results of MV/BV ratio

and ranking method are nearly consistent. For instance, Avon Products has highest

MV/BV ratio and highest show-off value, Crown Cork has lowest MV/BV ratio and lowest

show-off value.

MV is 4.83 time more than BV of a company, expectantly. 82.15% companies have show

values from –2 to 2, and there are 28.57% companies (most frequently) appearing in the

same ordered 10-company group of two ranking.

Almost industries have a nearly linear relation between MV and BV (correlation coefficient

> 0.7) except container & packaging industry (0.25). The correlation coefficient between

MV and BV of all companies is 0.772. After removing 5 companies that have highest or

lowest show-off value (refer to table 4.4) the correlation coefficient increase to 0.776. We

can conclude that these companies distort the relation between MV and BV of the range of

companies.

5. Further analysis on special cases

Almost of the companies in S&P 500 has MV higher than BV in 1998. According to

calculation of Ned Riley –a strategist at Bank Boston, only 20% of the rise in the broad

S&P 500 index since 1990 was linked to increased profits. Fully 80% stems from rises in


the average p/e ratio. On the other hand, stock prices rose, on average, by more than 15%

in 1998 when profits were 12% lower than a year earlier.

The reason of this phenomenon is the increase of demands (especially in big companies):

Foreign investors are pouring money into American shares –with net purchases of

$64 billion in 1997 and $43 billion in 1998.

Companies have been buying their own shares. They bought $263 billion more than

they issued in 1998.

American baby-boomers are pumping money into retirement funds, and the growing

share of this money is going to funds that track big stock market indices.

To go further, we analyze particular reasons for 4 companies with highest or lowest show-

off values. All the reasons above is right for 3 companies: Avon Products, Gap, Providian

Financial (highest show-off values). Crown Cork & Seal (lowest show-off value) is the

exception, it has special reasons why its market price too low compared with book value.

5.1 Avon Products, Inc.(*)

BV=285.1 million

MV=10927.4 million

a. Introduction

The Company is one of the world's leading manufacturers and marketers of beauty and

related products, which include cosmetics, fragrance and toiletries (CFT); gift and

decorative; apparel; and fashion jewelry and accessories. Avon commenced operations in

1886 and was incorporated in the State of New York on January 27,1916. Avon's business

is comprised of one industry segment, direct selling, with worldwide operations.

The world’s developing markets have been driving Avon’s financial performance. The

company has entered 18 new markets since 1990. And for the past five years, sales and

(*) All information is gotten from http://www.avon.com/


pretax profits from operations in developing markets have grown at compound annual

rates of 16% and 14%, respectively.

Nine consecutive years of sales and earnings growth

Eight consecutive years of dividend increases

Current annualized dividend rate $1.36

b. Operating activities

The key to Avon's success is the quality of its senior executives. Worldwide, the company

benefits from a unique management mix of global direct sales and marketing expertise.

The breadth and depth of Avon's management team enables the company to strategically

leverage a dynamic and diverse business portfolio with operations in 45 countries and

sales in 135 countries.

On October 23,1997, the Company announced that it has raised its long-term growth

targets for sales and earnings and that it expects to record special charges in connection

with a major re-engineering program. Commencing in 1998,the long-term target for sales

growth has been raised to 8-10% compounded annually, and its target for earnings per

share growth has been raised to 16-18% annually. Previously, the Company targeted long-

term sales growth of 6-8% and long-term earnings per share growth of 13-15%. The higher

targets come largely as a result of initiatives currently underway and others under review

intended to reduce costs by up to $400.0 million a year by 2000,with $200.0 million of the

savings being reinvested concurrently in advertising and marketing programs to boost

sales. Avon expects to record special charges totaling $150.0-$200.0 million pretax to

cover one-time costs associated with the re-engineering program. Approximately half the

charges are expected to be recorded in the first quarter of 1998, with the balance to be

recorded in early 1999. Approximately $50.0 million of the charges will be cash related.

In 1994, Avon introduced a line of apparel in the U.S., which by 1997 achieved over $500

million in sales. In 1996 and 1997, the Company had outstanding success with Barbie

dolls, designed exclusively for Avon, making her the Company's best selling gift product

ever. The relationship with Mattel was expanded in 1997 to include additional products.

This array of products, available through the direct selling channel, increases earnings


opportunities and presents a consistent beauty image to consumers across a broad

product line.

Avon's products are sold worldwide by approximately 2.6 million Representatives,

approximately 445,000 of whom are in the United States

Avon has pioneered many innovative products, including Skin-So-Soft, its best-selling bath

oil; BioAdvance, the first skin care product with stabilized retinal, the purest form of Vitamin

A; and Collagen Booster, the premier product to capitalize on Vitamin C technology. Avon

also introduced the benefits of aromatherapy to millions of American women, encapsulated

color for the Color-Release line and introduced alpha-hydroxy acid for cosmetic use in the

Anew Perfecting Complex products. Today, Avon's Anew product line has been expanded

to include technologically advanced products such as Retinal Recovery Complex PM

Treatment and Night Force Vertical Lifting Complex. Night Force employs a patent-

pending material named AVC10, a molecule that was engineered by Avon researchers over

a three-year period.

On a consolidated basis, Avon’s net sales of $5.21 billion increased 3% from $5.08 billion

in 1997. Sales in North America increased 5% to $2.06 billion primarily due to a 5%

increase in the U.S. attributable mainly to a higher average order size. International sales

increased 1% to $3.15 billion from $3.11 billion due to strong growth in Latin-America,

most significantly in Brazil, Mexico, Argentina and Venezuela, as well as in Europe

reflecting improvements in the United Kingdom and Poland. These increases were partially

offset by sales declines in the Pacific, most significantly in Japan, China and the

Philippines. Excluding the impact of foreign exchange, consolidated net sales rose 9%

over the prior year. In 1997, consolidated net sales of $5.08 billion increased 6% from

$4.81 billion in 1996. International sales increased 7% to $3.11 billion from $2.92 billion in

1996 due to strong growth in Latin America, most significantly in Mexico, Argentina, Chile

and Venezuela, and in the United Kingdom, Russia, Central Europe and the Pacific Rim,

primarily Taiwan and the Philippines. These improvements were partially offset by sales

declines in Germany, Brazil and Japan. Sales in North America increased 4% to $1.97

billion primarily due to the 1997 acquisition of Discovery Toys and an increase in the U.S.

average order size partially offset by a decrease in the number of Representative orders.


Excluding the impact of foreign currency exchange, 1997 consolidated net sales rose 10%

over 1996.

c. Investing activities

The Company presently has operations in 44 countries outside the U.S. and its products

are distributed in 90 more, for coverage in 135 markets and it continues to expand into

new markets. The Company has entered 18 new markets since 1990,including Russia and

China and rapidly emerging nations throughout Central Europe, and is currently evaluating

several other markets in Eastern Europe and Asia Pacific.

d. Financing activities

Share Repurchase Program

Avon announced in July 1998 that it would more than double the size of its stock

repurchase authorization. The current program, which began in February 1997, had

originally authorized buyback of up to $500 million over the next three-to-five years. The

company authorized another $600 million, or a total of $1.1 billion, for repurchases over

that same period. Funds will come primarily from internally generated cash flow.

Avon has been purchasing its shares in the open market on a regular basis since February

1994. Through December 31, 1998, the company has purchased a total of about 32 million

shares for approximately $642 million, or an average of about $20 per share

During 1994, Avon’s Board authorized a stock repurchase program under which Avon

would buy back up to 10% of its then outstanding common stock, or approximately 28.0

million shares. As of February 1997, when the plan ended, the cumulative number of

shares repurchased was 25.3 million shares at a total cost of $424.4 which are included in

Treasury Stock. Under a new repurchase program, which began in February 1997, the

Company repurchased approximately 6.7 million shares at a total cost of approximately

$217.2 as of December 31, 1998. Under this new program, the Company may buy back up

to $1,100.0 of its currently outstanding common stock through open market purchases

over a period of up to five years.


Stock Split

On July 22, 1998, the Company declared a two-for-one stock split in the form of a 100%

stock dividend, which was distributed in September 1998 to shareholders of record as of

the close of business on August 24, 1998. Accordingly, the stock split has been

recognized by reclassifying the par value of the additional shares resulting from the split

from retained earnings to common stock and treasury stock. The effect of this stock split

was not retroactively reflected in the consolidated balance sheets and in the statements of

changes in shareholders’ equity for 1997 and prior periods. All references to the number of

share and per share amounts elsewhere in the consolidated financial statements and

related footnotes have been restated to reflect the effect of the split for all periods

presented.

Share Rights Plan

Avon has a 1988 Share Rights Plan under which one right has been declared as a

dividend for each outstanding share of its common stock. Each right, which is redeemable

at $.005 at any time at Avon’s option, entitles the shareholder, among other things, to

purchase one share of Avon common stock at a price equal to one-half of the then current

market price, if certain events have occurred. The right is exercisable if, among other

events, one party obtains a beneficial ownership of 20% or more of Avon’s voting stock.

Dividends policy

On February 5, 1998, Avon increased the regular dividend on common shares to an

annual rate of $.68 per share with the first quarterly dividend at the rate of $.17 per share

having been paid on March 2, 1998. On February 1, 1997, Avon increased the regular

dividend on common shares to an annual rate of $.63 per share, with the first quarterly

dividend at the rate of $.1575 per share having been paid on March 3, 1997. On February

1, 1996, Avon increased the regular dividend on common shares to an annual rate of $.58

per share, with the first quarterly dividend at the rate of $.145 per share having been paid

on March 1, 1996.

e. Analysis

Avon stock price increases with a amazing speed because of many reasons:


The high speed and substantial growth

Success in operating activities

Investing in all over the world

Having suitable and excellent financial policies and activities such as share

repurchase program, stock split, share rights plan, and dividends policy.

In addition, products of Avon (beauty and related products, which include cosmetics,

fragrance and toiletries; gift and decorative; apparel; and fashion jewelry and accessories)

are high value added. The values of them exceed much more than their costs. Therefore,

market value of Avon is very high compared with its book value.

5.2 Providian Financial, Co.(*)

BV=803.3 million

MV=14390.6 million

a. Introduction:

Providian Financial Corporation is a company with a history of success that was started as

a small community bank founded in 1853 in Tilton, New Hampshire. Today, it is a world-

class provider of customized consumer lending products. Providian's headquarters are

located in San Francisco. It also has a number of operations centers throughout the

country -- in California (San Francisco, Pleasanton, Fairfield, and Sacramento), Kentucky,

New Hampshire, and Utah.

Providian Financial Corporation is a growth company focused on consumer lending,

offering credit cards, and revolving lines of credit, home loans, and fee-based services that

complement its credit products. It also offers deposit products, including money market

deposit accounts and certificates of deposit. Its customer base is extremely broad: it has

more than 8 million customers and over $14 billion in managed assets. In fact, Providian

Financial Corporation was the top performing stock in the S&P 500 Financial Index and the

(*) All information is gotten from http://www.providian.com/


seventh best-performing S&P 500 stock in 1998, a year in which the S&P as a whole

delivered excellent returns.

As of December 31, 1998, the Company (on a consolidated basis) had 6,110 employees

and a total workforce, including temporaries and contract employees, of 6,847.


This is the report on Providian Financial Corporation's outstanding in 1998 results. This is

their second year as a publicly traded company, but its thirteenth year of record earnings.

Total managed revenues increased by 57% to $2.4 billion from $1.5 billion in 1997.

Net income grew to $296.4 million—a 55% increase.

Total customer relationships increased by 71% to 8 million.

Year Ended December 31, 1997 Compared to Year Ended December 31, 1996

Net income for the year ended December 31, 1997 was $191.5 million, representing an

increase of 20% over the $159.8 million in net income for the year ended December 31,

1996. This increase was attributable to 40% growth in managed revenue (managed net

interest income plus managed fee income) driven by managed loan growth, a widening net

interest margin and strong fee-based revenues. Managed loans increased by $602 million,

or 6%, despite increased competition for balances and declining customer loyalty across

the industry, with 65% of the growth coming from secured and partially secured credit card

loans, 19% from home loans, and 16% from unsecured credit card loans.

It has a broad array of credit products and it takes them one step further. By customizing

rates, credit lines, and other features, it can design an account for a market segment of

one. This enables it to meet the needs of individuals who may not qualify for credit

elsewhere. As a result, Providian is not “just” a credit card company and not “just” a home

loan company, but a broad market consumer lender.

Year Ended December 31, 1998 Compared to Year Ended December 31, 1997

Net income for the year ended December 31, 1998 was $296.4 million, representing an

increase of 55% over net income of $191.5 million for the year ended December 31, 1997.


This increase was primarily attributable to strong growth in fee revenue through increased

penetration rates for sales of fee-based products to the Company’s existing customer base

as it will as the introduction of new product configurations. In addition, the Company

continued to increase its earning assets and strengthen net interest margins while relying

less on low introductory rates to attract customers.


The Company reinvested a portion of the increased managed revenue to strengthen loan

loss reserves, increase marketing investment, and build infrastructure, such as expanding

the employee base and product support systems. Non-interest expense increased $251.1

million during 1998 to $825 million, due to the expenses associated with servicing a

greater number of customers and increased marketing activity.

Providian also invested in its future —in the form of new products, markets, and

technology—to provide continued growth. It created 2,000 new jobs and invested in the

communities in which it operates.

Providian continuously invests for future growth. It is constantly testing new markets and

products. It is evaluating new ways of doing business, including the Internet. And it has

begun expanding its boundaries internationally, starting in the United Kingdom—an

attractive market for consumer lending. And consolidation generates new possibilities for

Providian.


Historical earnings per share are not presented for the years ending December 31, 1997

and 1996 because before the spin-off, all of the Company’s common stock was held by its

then parent, Providian Corporation, and such information would not be meaningful.

Providian Corporation options which were exercised between January 1, 1997 and June

10, 1997. These options have been included because, upon these exercises, it became

eligible to be converted to the Company’s common stock on the spin-off distribution date.

For the year ended December 31, 1996, all Providian Corporation options issued and

outstanding were included in the fully diluted computations. Understanding and managing


risk / reward trade-off is a core competency at Providian and one of the critical drivers of

its success.

e. Analysis

The ratio of Market value and Book value of Providian Corporation is 17.92 – very high.

There are some reasons leading to this result:

Providian have a 146 years of operating. This is a very persuaded proof of its

capability to exist and progress in a very competitive environment.

One of the reasons of its success is its customer – oriented operation strategies.

Providian knows customers’ wants and it serves them in the best way it can to earn

profit.

With right strategies, Providian’s result of operating activities was very impressing.

Moreover, Providian also has a good investing strategy such as investing in the

future - in the form of new products, markets, and technology—to provide continued

growth. It also created 2,000 new jobs and invested in the communities in which it

operates as part of its commitment to give something back.

Nature of its operation is service, a very high value added product.

5.3 Gap, Inc.(*)

BV=1573.5 million

MV=36875.4 million

a. Introduction

The Gap, Inc. (together with its subsidiaries, the "Company") is a global specialty retailer

which operates stores selling casual apparel, personal care and other accessories for

men, women and children under the Gap, Banana Republic and Old Navy brands. As of

(*) All information is gotten from http://www.gap.com/


February 27, 1999, the Company operated 2,448 stores in the United States, Canada, the

United Kingdom, France, Germany and Japan.


The total net sales growth for all years presented was attributable primarily to the increase

in retail selling space both through the opening of new stores (net of store closed) and the

expansion of existing store. An increase in comparable store sales also contributed to net

sales growth for all years presented. On the other hand, cost of good sold and occupancy

expenses as a percentage of net sales decreased 3.1 and 0.4 percentage points in 1998

from 1997 and in 1997 from 1996, respectively.


During fiscal year 1998, the Company opened 318 stores and closed 20. The newly

opened stores include 102 Gap stores (including 27 international locations), 65 GapKids

and babyGap stores (including 23 international locations), 33 Banana Republic stores

(including 1 in Canada) and 118 Old Navy stores. In addition, during fiscal 1998, the

Company expanded 135 stores. The expanded stores include 91 Gap stores, 17 GapKids

stores, 23 Banana Republic stores and 4 Old Navy stores. The 2,428 stores operating as

of January 30, 1999 aggregated approximately 19 million square feet. The Company has

operated a large number of geographical dispersed stores.


On October 28, 1998, the Company's Board of Directors authorized a three-for-two split of

its common stock effective November 30, 1998, in the form of a stock dividend for

shareholders of record at the close of business on November 11, 1998. All share and per

share amounts in the accompanying consolidated financial statements for all periods have

been restated to reflect the stock split.

In October 1998, the Board of Directors approved a program under which the Company

may purchase up to 45 million shares of its common stock. This program follows an earlier

67.5 million-share repurchase program, under which the Company acquired 23.8 million

shares for approximately $910 million during 1998. To date under the earlier program 66.1

million shares have been repurchased for approximately $1.7 billion.


e. Analysis

The Company's continued success depends, in part, upon its ability to increase

sales at existing store locations, to open new stores and to operate stores on a

profitable basis.

The Company continued to expand internationally in fiscal 1998. These activities of

the Company illustrate the increasing development of Gap.

Cash flow statement shows a positive signal with its cash inflow. It is found that

cash provided by operating activities offset cash outflow used for investment. Cash

provided by operating activities has increased for all year. It may result from an

increase in net earning and the timing of payments for certain payables. For example,

the increase in cash provided by operating activities was due to an increase in net

earning and the timing of payments for certain payables partially offset by investments

in merchandise inventory. The decline in working capital and the current ratio was

attributable to an increase in payables driven by business growth combined with a

decrease in cash resulting from greater capital expenditures and share repurchased.

For the fiscal year ended January 31, 1998, the increase in cash provided by operating

activities was attributable to an increase in net earning offset by investments in

inventory and the timing of payments for income taxes and certain payables.

The business activities of a company are reflected very well by its operating

activities. These activities ensure the company’s substantial development. For

shareholders, these activities are very meaningful.

Increase in net sales as well as net earning of Gap. Inc. attracts investors. It is more

important that net cash flow has been up. The increase in cash flow was attributable to

an increase in cash provided by operating activities. The cash outflow used for

investing activities was attributable to an increase in investing in purchasing property

and equipment. Net sale, net earning, cashes flow for all year move in positive

direction which may be good predictors for future development. As known above, the

increase in net sale and net earning were attributable to globally expanding Gap, Inc.’s

business activities.


Moreover, cash flow used for financing activity point out that the Company has put

its money into purchasing property and equipment. This investment has been

increasing and is able to reflect potential growth in its operating activities. This is a

good predictor on which investors base to anticipate Gap’s future development.

Basing on consolidate cash flow statement, the Company’s cash out flow is

attributable to increase in purchasing treasury stocks. It may show that Gap, Inc.

believe about it own business when it invested in its own stocks.

Products of Gap, as Avon, are high value added.

All of reasons above leading to the result that market value of GAP is very high compared

with its book value.

5.4 Crown Cork & Seal Company, Inc.(*)

BV=3892.6 million

MV=3400.4 million

a. Introduction

The Company is the world's leading manufacturer of packaging products for consumer

goods. The Company believes that it is unique in its industry in its ability to supply food,

beverage and aerosol containers to multinational consumer marketers on a global basis.

The Company currently operates 223 plants located in 49 countries and employs 38,459

people. World headquarters are located in Philadelphia, Pennsylvania. 1

Under current management, the Company has pursued a strategy of growth by acquisition

within the global packaging industry. Over the past nine years, the Company has

completed approximately 20 acquisitions of companies.

(*) All information is gotten from http://www.crowncork.com

1 CROWN CORK & SEAL, Sharpens Focus On The European Personal Care Market For Hdpe Plastic Containers, Philadelphia, PA - July 27, 1998.


b. Analysis

About this company, we only discuss the reasons why it has very low show-off value. All

its activities that do not cause to this problem will be ignored.

During the year 1998, its market value significantly declined 38% from $50 mil. to $30 mil. This decline is due to many reasons:

In 1998, company spent big amount on restructuring and other charges that

dramatically reduced the net income. That the book value decreased 9,4% during that

year. This caused the decrease in market value also.

The Company has various commitments to purchase materials and supplies as part of the

ordinary conduct of business. Such commitments are not at prices in excess of current

market. The Company’s basic raw materials for its products are tinplate, aluminum and

resins, all of which are purchased from multiple sources. The Company is subject to

material fluctuations in the cost of these raw materials and has periodically adjusted its

selling prices to reflect these movements. There can be no assurance, however, that the

Company will be able to recover fully any increases or fluctuations in raw material costs

from its customers.

The Company is one of a number of defendants in a substantial number of lawsuits

filed by persons alleging bodily injury as a result of exposure to asbestos

From 1985 through 1997, the Company disposed of approximately 70,000 cases for

amounts, which aggregated approximately one-half of the original fund. Until the fourth

quarter of 1998 the Company considered that the fund was adequate and that the

likelihood of exposure for this litigation in excess of the amount of the fund was remote.

This view was based on the Company’s analysis of its potential exposure, the balance

available under the 1985 settlement, historical trends and actual settlement ranges. A

change in Texas law, which limits out-of-state plaintiff filings in that state, and which will

therefore be favorable in the long-term, caused, along with other factors, an unexpected

increase in claims activity. This, along with several larger group settlements, caused the

Company to reevaluate its position.


The liability recorded for asbestos claims constitutes management’s best estimate of such

costs for pending and future claims. Because of the uncertainties related to this kind of

litigation, the Company believes it is not possible to estimate the number of personal injury

claims that may be filed after 2003. The Company cautions, however, that inherent in its

estimate of liabilities are expected trends in claim severity, frequency and other factors

which may vary as claims are filed and settled or otherwise disposed of. Accordingly,

these matters, if resolved in a manner different from the estimate, could have a material

effect on the operating results or cash flows in future periods. While it is not possible to

predict with certainty the ultimate outcome of these lawsuits and contingencies, the

Company believes, after consultation with counsel, that resolution of these matters is not

expected to have a material adverse effect on the Company’s financial position or liquidity.

The Company is also subject to various other lawsuits and claims with respect to matters

such as governmental and environmental regulations and other actions arising out of the

normal course of business. While the impact on future financial results is not subject to

reasonable estimation because considerable uncertainty exists, management believes,

after consulting with counsel, that the ultimate liabilities resulting from such lawsuits and

claims will not materially affect the consolidated results, liquidity or financial position of the

Company.

The above facts were the main reasons for the decline of the market value. Company was

too much involved with lawsuits and that lost the belief of shareholders. Thus for, market

value went down.

It cut down plants and staff

During 1998, the Company provided $179 ($127 after-tax or $.95 per share) for the costs

associated with the plan to close thirteen plants and the reorganization of three additional

plants. These actions reflect the Company’s continued commitment to realign its

manufacturing facilities with the objective of enhancing operating efficiencies. Included in

the restructuring charge were costs to provide severance and related benefits, write-down

of assets and other exit costs.


Other non-recurring exit costs are estimated at $20 and are primarily a cash expense,

comprising the costs to effectively close and dispose of the facilities identified in the 1998

plan. Exit costs include, but are not limited to, fees related to lease termination and other

contract cancellations, dismantlement costs and brokers’ fees for assets to be sold. These

costs are expected to be substantially incurred by the end of 1999.

During 1996, the Company provided restructuring costs relative to the acquisition of

CarnaudMetalbox (CMB). Affected by the plan of restructuring were forty plants and

regional administrative offices, which were closed, and an additional fifty-two plants which

were reorganized. Other exit costs, primarily repayments of government grants and

subsidies, were approximately $60 and were primarily cash expenses. The restructuring

costs recorded in connection with the CMB acquisition included a $95 restructuring charge

announced in 1996 by CarnaudMetalbox Asia, Ltd., a subsidiary of CMB. Remaining

balances in the restructuring reserve primarily relate to payment options available to

employees under termination agreements.

Such agreements were made with the respective union or with the local governmental

body generally, and provide that a portion of the employee severance is paid when the

employee is terminated and the remaining portion is paid out over an agreed period.

In 1996, the Company also provided $40 ($32 after-taxes or $.24 per share) for the costs

associated with exiting certain lines of business in its South African operations, the closure

of a South American operation and costs associated with restructuring existing businesses

in Europe.

It was seen an amazing statistic recently.

Eighty-three percent of last year’s appreciation of the stocks in the S&P 500 Index at the

start of 1998 was attributable to one internet-oriented stock alone. Internet stock valuations

no doubt reflect the growth of a powerful new phenomenon in society today.


6. Lessons learnt from the project

After completing this project, we understand more clearly about the differences between

book value and market value. On the other hand, we improve our skills, knowledge, and

experience. There are some of our results:

Establishing a worksheet to measure the association between book value and

market value.

Finding some interesting observations around stock market as we mention above.

Finding relevant information for financial analysis, mainly on Internet.

Understanding the changes of book value and market value of a company and its

reasons.

The lessons above help us understand more about theoretical lessons in the class and

have a practical image of the stock market. They are very useful for us, especially when

the stock market is established in Vietnam.


Reference

Van Horne, J. and Wachowicz, J., 1998, Fundamentals of Financial Management, Prentice

Hall, New Jersey.

Winger, B. and Frasca, R., 1995, Investments-Introduction to Analysis and Planing,

Prentice Hall, New Jersey.

http://invest-faq.com/

http://www.avon.com/

http://www.providian.com/

http://www.gap.com/

http://www.crowncork.com/

‘The Bulls’ Last Charge?’, The Economist, March 20th 1999, pp.77, 78

http://www.crowncork.com/

http://www.gap.com/

http://www.providian.com/

http://www.avon.com/

http://invest-faq.com/

Sample 21. Introduction....................................................................................................................22. Literature Review...........................................................................................................23. Data analysis..................................................................................................................6

3.1. Introduction of analysis sources..............................................................................6

3.2 Studied companies..................................................................................................6

4. Statistical Analysis.........................................................................................................7

4.1. Correlation Coefficient...............................................................................................7

4.2. Ranking- show on/off...............................................................................................10

4.3. MV/BV ratio..............................................................................................................17

5. Analysis on Special Cases.......................................................................................18

5.1. INTEL Corporation...................................................................................................18

5.2. GENERAL MILLS, INC. (GIS).................................................................................23

5.2.1. Analysis on Food Industry.................................................................................23

5.2.2. General Mills, Inc. (GIS)....................................................................................24

5.3 CAMPBELL SOUP Company (CPB).....................................................................29

5.4 KELLOGG Company.............................................................................................34

6. Learning effects............................................................................................................37

7. 1. Introduction

Stock market plays a very important role in the sustainable development of businesses. It

helps to transfer capital from the redundancy to the lacking easily and conveniently by way

of selling stocks to those who have surplus capital. By selling stock, organizations will

have more capital. The firm capital can be from many sources and stock is one of those

sources. Therefore, an insight of what is stock and how it work must be beneficial and

must be known by all firms who want to raise fund by stock, as well as those who want to

invest in stock for profit.

We can see that the demand for financial information is high and financial analysis, or

stock analysis in specific, is a tool for gaining those information. Users of financial

information can be investors in the firm, business contacts, government or intermediaries

like investment analysts who give advice of buying, selling or estimating the earning.

So, how do they analyze the stock in reality? What is the use of information analyzed?

What diagnosis can be made? What is the trend of market stock in general and what is the

prospect of a particular firm that we would like to invest our money to? All those queries

and the like will be answered through this project which analyze the stock market holding

companies from the Standard & Poor’s 500, hoping to get insight of the stock market in

reality.

2. Literature Review

The concept of book value and market value can be determined as valuing an asset or a

firm. In term of an asset, ‘the book value of an asset is the accounting value of the asset –

the asset’s cost minus its accumulated depreciation’. And ‘the market value of an asset is

simply the market price at which the asset (or a similar asset) trades in an open

marketplace’.2 Thus, the book value of an asset is based on the historical values, the asset

cost as well as amount of depreciation, it is a fix value at a point of time. However, the

trade price of an asset can be either lower or higher than its book value. When concerning

to stock, it means concerning to the market value and book value of a firm. ‘The book

value of a firm is equal to the dollar difference between the firm’s total assets and its

liabilities and preferred stock as listed on its balance sheet’.3 The book value per share of

common stock is the shareholders’ equity divided by the number of share outstanding.

Differently, ‘market value per share is the current price at which the stock is traded’, ‘it is a

function of the current and expected future dividends of the company and the perceived

risk of the stock on the part of investor’.4 So, the market value of a share of common stock

will usually differ from its book value that can draw from the balance sheet at a point in

time. Market value of a share is a fluctuating value, it is the price of selling and buying of

the stock on the marketplace. ‘If markets are reasonably efficient and informed, the current

market price of a security should go up and down around its intrinsic value – the present

value of the cash-flow stream provided to the investor, discounted at a required rate of

return appropriate for the risk involved. 5

2 Fundamentals of Financial Management, pp. 66

3 Fundamentals of Financial Management, pp.66


5 Fundamentals of Financial Management, pp.66-67

Since the book value only reflect the account book of the firm, it reflect nothing of other

aspects such as its reputation, its prospect of growing as well as bad effects from the

environment that the firm has to confront with in the future. Therefore, the market value of

security can be higher or lower than its book value at the moment in time. In another hand,

book value of stock, at a given time, can be calculated as the result of net income divided

by return on equity at that time.

So, market value may have some effect on book value in case the net income and/or

return on equity are changed due to changing in the market value of the company’s stock.

We can say that the book value has a certain relationship to the market value of the

company’s stock. To discover more their relationship, we need to clarify what are net

income and return on equity and how they are affected by the market value of the

company’s stock.

Net income of the firm is the profit after deducted all operating expense and financial

expense and return on equity (ROE) is the net income available for shareholders divided

by total equity. Return on equity varies with the performance of the firm. Required return

on equity of a firm depends on its risk, if the firm’s risk is high then return on equity is high

and vice versa. In case the firm is issuing its stock and it is in good business conditions,

the market value of the firm stock would be higher and thus the firm would gain more in

capital. So, it would get more profit and return on equity must be higher due to good

performance and so, book value is consequently higher.

All prices on the market are partly influenced by the supply and demand of the particular

products or services. In case of stock, demand is the primary factor influencing to the

market value of stock. In addition, supply, in some cases, also affect to the stock price.

Market value of the stock may depend on the profit potential of the investing or the

prospect of the firm. Sometime, false demand, create by brokers, can induce the higher

value. There are many ways to value the stock on the market: technology analysis which

use charts and graphs, look for a trend in price; analysis based on economic factors such

as information from the balance sheet, profit ratio, sales and the like. It always fluctuates

around its intrinsic value as mentioned above. When the future dividend is estimated

exactly, the market value will be very near its intrinsic value but this case is very rare.

Besides, there are many factors that can affect the share prices of the firm. Since the

intrinsic value of a share can be express as present value of expected future dividends,

that is

Where ke is the require rate of return on a security and Dt is expected dividend at period t.

And the firm’s stock is expect to grow perpetually with g is the expected annual grow rate.6

If the require rate of return changes, higher for instant, and divided grow remained

unchanged, dividend yield would have to rise too. And thus, with the unchanged dividends,

value of share must be lower. In another hand, the require rate of return for particular stock

can be calculated as the result of risk-free rate plus systematic risk as depicted by Beta,

an index of stock systematic risk related to that of portfolio. The greater the Beta, the

greater its systematic risk, and thus, the greater the requite rate of return of the particular

stock. 7 In overall, we can say that market value and book value have a rather close

relationship and market value is always expected to be higher than its book value.

6 Fundamentals of Financial Management, pp.104-105


3. Data analysis

3.1. Introduction of analysis sources

Source of this stock analysis project is the Industry Rankings of the S&P 500 (Standard &

Poor’s 500). The S&P 500 represents for 70% of the market capitalization of all U.S stock.

Each company is ranked within industry groups as well as ranked in overall by eight

criteria which are one-year total return; three-year total return; one-year sales growth;

three-year average annual sales growth; one-year profit growth; three-year average

annual profits growth; net profit margins; and return on equity , with additional weight given

to a company’s sales. A company’s composite rank is calculated using the sum of all of its

ranks.

3.2 Studied companies

We are studying a whole array of 78 companies in four industries. They are 15 companies

in Discount & Fashion Retailing, 26 in Electrical & Electronics, 21 in Food and 16 in Fuel

Industries.

4. Statistical Analysis

We will study the association between MV and BV across companies via 3 criteria:

correlation coefficient, ranking – show on/ off and MV/BV ratio. Market value (MV) is share

prices on February 26, 1999 multiplied by the latest available common shares outstanding.

Book value is Sales multiplied by Net margin and then divided by ROE.

4.1. Correlation Coefficient

Using Correl function in Excel worksheet we get the following correlation coefficients.

Table 1. Correlation coefficient

Population Average MV

(in $ million)

Average BV

(in $ million)

Weigh in total MV

Correlation coefficient

All studied companies 16,176.5 4,363.2 100.0% 0.849

Discount & Fashion Retailing industry 8,071.2 3,135.2 9.6% 0.407

Electrical & Electrics industry 16,118.7 3,456.6 33.2% 0.906

Food industry 11,876.2 1,761.3 19.8% 0.183

Fuel industry 29,513.3 10,402.9 37.4% 0.975

Because two industries of larger weight (Electrical & Electric and Fuel) have high

correlation coefficient, the market (total studied companies in our case) also has high one

(0.849). We can say that MV/BV association is rather close. Sorting data in a whole array

and in each industry in order of MV and arranging charts, we get the following. (See chart

#1,2,3,4,5).

Chart 1: MV&BV - All companiesCorrelation coefficient 0.849

050000

100000150000200000

0 20 40 60 80

usd

Market value Book value

Chart 5: MV&BV - Fuel IndustryCorrelation coefficient 0.975

04000080000

120000160000

0 5 10 15 20Market value Book value

Chart 3: MV&BV - Electrical & Electronics Industry

Correlation coefficient 0.906

050000

100000150000200000

0 10 20 30

usd


Chart 4: MV&BV - Food IndustryCorrelation coefficient 0.183

06000

12000180002400030000

0 5 10 15 20 25

usd


Chart 2: MV&BV - Discount & Fashion Retailing Industry

Correlation coefficient 0.407

05000

100001500020000

0 5 10 15 20

usd


Looking at trend (direction and significance of change) of MV and BV lines and comparing

with relevant correlation coefficient we can see that the more visible the pattern of

relationship between two lines, the higher correlation coefficient and accordingly the

stronger MV/BV association. Fuel and food industries are two opposite evidences

supporting for this remark. In next step we can predict that abnormal peaks and valleys in

charts, hereinafter called “peculiar points”, probably have adverse impact on the MV/BV

association as well as correlation coefficient. Companies at these "peculiar" are

determined as Intel, Archer Daniels Midland, General Mills, Campbell Soup and Kellogg.

We will take out data of companies at the “peculiar points” and notice possible changes.

(See chart # 6, 7).

Comparing chart #1 with #6 and chart #4 with #7 we may have a comment that the pattern

of relation between MV and BV lines appears more obvious and correlation coefficients in

both cases remarkably increase. This noticed change means these companies have

certain impact on the MV/BV association of the whole market. The impact is attributable to

(i) weigh of these company’s MV in total, and (ii) adverse direction of their BV, MV along

the MV/BV lines of the whole.

Chart 6: MV&BV - All companies (Intel Inc. excluded)

"Adjusted" correlation coefficient 0.937

050000

100000150000200000

0 20 40 60 80

usd


Chart 7: MV&BV - Food Industry(Four "peculiar" companies excluded)

"Adjusted" correlation coefficient 0.595

05000

1000015000200002500030000

0 5 10 15 20

usd


4.2. Ranking- show on/off

We rank companies in groups of 10 in orders of MV and BV. The difference between their

ordinal number in BV and MV ranking will be show-off value. Show off value of zero is

show on value. We get the following table.

7.1.1.1 Table 2 List of show on/off value

Book Value Ranking On/off = BV-MV 7.1.1.2 Market Value Ranking

First top 10 First top 10

EXXON 0 INTEL

ROYAL DUTCH PETROLEUM 0 EXXON

INTEL 0 ROYAL DUTCH PETROLEUM

MOBIL 0 MOBIL

CHEVRON 0 CHEVRON

TEXACO (1) MOTOROLA

MOTOROLA 0 TEXAS INSTRUMENTS

RAYTHEON (1) SAFEWAY

SCHLUMBERGER 0 SCHLUMBERGER

J. C. PENNEY (3) EMERSON ELECTRIC

Second top 10

TEXAS INSTRUMENTS 1 TEXACO

ARCHER DANIELS MIDLAND (2) SARA LEE

EMERSON ELECTRIC 1 H.J.HEINZ

KMART (2) RAYTHEON

SEARS, ROEBUCK 0 CAMPBELL SOUP

FEDERATED DEPARTMENT STORES (3) COSTCO

HALLIBURTON (1) SEARS, ROEBUCK

MAY DEPARTMENT STORES (1) KELLOGG

MICRON TECHOLOGY 0 CONAGRA

USX-MARATHON GROUP (3) MICRON TECHOLOGY

(…continued)


Third top 10

OCCIDENTAL PETROLEUM (3) ALBERTSON'S

COASTAL (2) STAPLES

TOY 'R' US (3) BESTFOODS

BAKER HUGHES (2) MAY DEPARTMENT STORES

BURLINGTON RESOURCES (2) HALLIBURTON

COSTCO 1 GENERAL MILLS

CONAGRA 1 AMP

SAFEWAY 2 WM.WRIGLEY JR.

DILLARD'S (4) SOLECTRON

AMERICAN STORES (1) FRED MEYER

Fourth top 10 Fourth top 10

ALBERTSON'S 1 SYSCO

HONEYWELL 0 AMERICAN STORES

FRED MEYER 1 J. C. PENNEY

LIMITED 0 ARCHER DANIELS MIDLAND

ROCKWELL INTERNATIONAL 0 HERSHEY FOODS

H.J.HEINZ 2 HONEYWELL

THERMO ELECTRON (3) KMART

COOPER INDUSTRIES (2) RALSTON PURINA

SARA LEE 2 ROCKWELL INTERNATIONAL

EATON (2) LIMITED

Fifth top 10 Fifth top 10

ASHLAND (1) FEDERATED DEPARTMENT STORES

AMP 2 QUAKER OATS

ADVANCED MOCRO DEVICES (2) COASTAL

SUNOCO (2) WINN-DIXIE STORES

NATIONAL SEMICONDUCTOR (2) DOLLAR GENERAL

STAPLES 2 USX-MARATHON GROUP

HARRIS (2) BAKER HUGHES

LSI LOGIC (1) BURLINGTON RESOURCES

GENERAL INSTRUMENT (1) NORDSTROM

RALSTON PURINA 1 PIONEER HI-BRED INTERNATIONAL

(…continued)


Sixth top 10 Sixth top 10

SYSCO 2 AUTOZONE

WINN-DIXIE STORES 1 OCCIDENTAL PETROLEUM

AUTOZONE 0 GENERAL INSTRUMENT

SUPERVALU (1) EATON

SOLECTRON 3 PERKIN-ELMER

NORDSTROM 1 KLA-TENCOR

KLA-TENCOR 0 COOPER INDUSTRIES

CONSOLIDATED STORES (1) LSI LOGIC

PIONEER HI-BRED INTERNATIONAL 1 TOY 'R' US

WM.WRIGLEY JR. 3 ASHLAND

Seventh top 10 Seventh top 10

THOMAS & BETTS 0 SUPERVALU

HERSHEY FOODS 3 SUNOCO

BESTFOODS 4 CONSOLIDATED STORES

PEP BOYS-MANNY, MOE & JACK (1) DILLARD'S

KELLOGG 5 ADVANCED MOCRO DEVICES

GREAT ATLANTIC & PACIFIC TEA (1) HARRIS

HELMERICH & PAYNE (1) THOMAS & BETTS

RAYCHEM 0 THERMO ELECTRON

DOLLAR GENERAL 2 RAYCHEM

ROWAN (1) NATIONAL SEMICONDUCTOR

Eight top 10 Eight top 10

CAMPBELL SOUP 6 NATIONALSERVICE INDUSTRIES

TEKTRONIX 0 ANDREW

NATIONALSERVICE INDUSTRIES 0 MILLIPORE

PERKIN-ELMER 2 GREAT ATLANTIC & PACIFIC TEA

ANDREW 0 PEP BOYS-MANNY, MOE & JACK

QUAKER OATS 3 TEKTRONIX

GENERAL MILLS 5 HELMERICH & PAYNE

MILLIPORE 0 ROWAN

Table 3 – List of peak show-off values

Company Name Show-offs Number of show-on: 20 (25.6%)

CAMPBELL SOUP 6 Number of positive show-off: 26 (33.3%)

KELLOGG 5 Number of negative shown-off: 32 (41.1%)

GENERAL MILLS 5

BESTFOODS 4

DILLARD'S (4)

A chart presentation for show-on and off may get an interesting finding. (See chart #8). In

this chart, each company will be represented by a point, whose location is determined by

the company’s BV and MV rankings. We will get a cloud for distribution of MV/BV rankings

as follows.

In the chart companies with

highest show-off value will

be positioned furthest from

the show-on line. They are

Campbell Soup, Kellogg,

General Mills and Dillard’s.

From the chart we may

have an observation that

there are more companies in negative show-off area (i.e. below the show-on line) than in

positive area. Their distribution is a bit more solid. Companies in positive area lay

Chart 9 MV/BV ratio

0.00

35.00

70.00

0 20 40 60 80

MV/BV ratio Characteristic line

scattered and farther away from show-on line. The characteristic line reveals that

companies in high ranking (either MV or BV or both) have tendency of positive show off

value. That means MV ranking is higher than BV ranking. Opposite tendency is applied to

those of lower ranking. If ranked in groups of 10, companies may fall in show-on area, in

addition to two existing show-off ones. The show-on area are surface of squares crossed

by original show-on line. Of course, number of companies with negative show off (both

positive and negative) declines accordingly.

4.3. MV/BV ratio

We are also study the MV/BV association by calculating MV/BV ratio across the

companies and put them into chart. We get the following.

We find that General Mills, Quaker Oats, Campbell Soup and Kellogg stay at peaks in

chart #9. They are remarkably above the others. Compared with characteristic line, these

companies’ ratios are obviously exceptional or “peculiar”. Characteristic line reveals that

MV/BV ratio is slightly downward sloping across companies from high to low MV ranking.

That means the higher MV the higher MV/BV ratio.

The foregoing analysis leads to a conclusion that the association between market value

and book value of our selected population of companies is relatively apparent. The links

between MV and BV are rather visible. These conclusions, however, should be put in the

context of some exceptional or “peculiar” cases, which are Intel, Campbell Soup, General

Mills and Kellogg. The “peculiarity” probably stems from reasons, which are attributable to

these companies. A further study on these special cases may have interesting findings,

which in turn bring us to a closer understanding about MV/BV association in real life. We

will study Intel, Campbell Soup, General Mills and Kellogg under criteria such as financial

performance, capital structure, M&A activities, personnel and HRD, market position,

research & development (R&D) over years, and new product launching.

5. Analysis on Special Cases

5.1. INTEL Corporation

Intel Corporation designs, manufactures and markets microcomputer components and

related products at various levels of integration. Intel’s principal components consist of

silicon-based semiconductors etched with complex patterns of transistors.

Looking at Intel MV record of 1986-1999 period we recognize an upward sloping trend.

Time that we are studying (i.e. February 26, 1999) is one of days that Intel’ MV reaches

the highest. Comparing with S&P500, Intel’s MV is always above. The furthest distance

away from S&P500 happened during the first quarter of 1999.

Exhibit 1 - Intel market value vs. SP500

(Source Yahoo Finance SEC Filing Intel)

We know that MV is a function of many factors, among which investors’ expectation about

company’s performance, dividend policy, business risk etc are important. The less risky

the company, the lower required rate of return on money (to be) invested in that company,

and consequently the higher company’s stock price. In order to get a better understanding

about extremely high MV in Intel’s case, our study should cover influence of both long-term

and short-term factors. They are financial performance, capital structure, market position,

research & development (R&D) over years, and new product launching.

Intel’s data on financial performance shows stability, continuing profitable growth over

years and superiority to other companies. We have seen a strong cohesiveness among

lower Beta (1.41), low debt ratio (.04 over equity) and higher growth rate of dividend

(21.06) as meaningful explanation on Intel MV. High dividend growth rate and low

SP500

Intel

debt/equity ratio represents a sustained profitability and a strengthened equity. With more

expanded capital base, the company can absorb bigger risks of all kinds or enlarge market

share through M&A. With such a bright perspective, Intel's MV must remain high justifying

investors' trust.

7.1.1.5 Table 4. Ratio comparison

Ratio Intel Industry Sector S&P 500

Beta 1.41 1.69 1.49 1.00

Dividend 5y growth rate 21.06 13.87 9.32 9.54

Net profit margin – 5y average 23.48 15.73 10.56 10.25

Return on equity – 5y average 32.60 21.51 21.37 21.81

Total debt to Equity .04 .12 .36 .99

Interest coverage 256.53 7.69 9.90 8.88

Net income/ employee 105,333.00 76,786.00 84,385.00 59,956.00

Source: Yahoo Finance Market Guide – Comparison Report for Intel Corporation

A strong belief or high expectation on the company position is represented by opinion of

Kerren Berger, an analyst of Everen Securities, in his 7 page Company Report on Intel

Corp. Report January 29, 1999. “Coverage was initiated with an OUTPERFORMER rating.

The company has seen the need for market sub-segmentation, introducing Celeron for the

low end, Pentium II for the mid-market and Pentium II Xeon for the high end. Declining PC

prices should continue to help the demand for microprocessors.”8

8 Yahoo Finance Research Abstract – Intel Corp.

Intel is the world's biggest chip maker. The company “continue(s) to grow at rates higher

than other leading semiconductor companies. (Its) semiconductor revenue is now almost 3

times that of the closest competitor”9. Their success in maintaining market share has

significant contribution in restoring investors’ confidence.

“Today, the number one reason to buy PC is to get on the Internet. As the computing

universe becomes connected, the demand PCs and entire computing infrastructure are

expanding”10. Analysts estimate one trillion dollars in Industry E-commerce revenues by

200211. Operating in such a high-tech industry of fast development and high demand, Intel

has enjoyed the advantages over others in all industries. With the support from a proper

management structure, these industrial advantages are fully utilized and translated into

high MV. Increased funds for R&D have shown how Intel makes use its industrial

advantages and proactively maintain these advantages to ensure excessively high MV.

The outcome of such an intensive R&D strategy is best seller microprocessors, among

which are Intel Celeron, Pentium II and Pentium II Xeon. In 1998 Intel “developed an

innovative new packaging technology for micro processors, the Organic LAN Grid Array,

that provides higher performance and versatility at lower cost for final product. They are

the only major chip maker using this packaging.”12

9 Intel CFO’s presentation at Goldman Sachs Technology Investment Symposium Feb 9, 1999.

10 Intel 1998 Annual Report – To our stockholders

11 www.intel.com – Intel Press Room Archives Feb 99

12 Intel 1998 Annual Report – To our stockholders

http://www.intel.com/

Exhibit 2 – R&D budget(Source Intel 1998 Annual Report – Facts and figures)

A very high MV on February 26, 1999 can be explained by some short-term factors. The most landmark event would be Intel’s introduction of the Pentium III processors on that very date. The product is of big importance. It is a major strategic objective for establishing new PC industry standard.13 Another thing should be Intel’s breaking 1-gigahertz barrier for a general-purpose microprocessor on February 23, 1999. These events surely had impact on market movement or investors’ expectation. The attractiveness of Intel’s securities in stock market has grown a step further.

13 Intel CFO’s presentation at Goldman Sachs Technology Investment Symposium Feb 9, 1999.

5.2. GENERAL MILLS, INC. (GIS)

7.1.2 5.2.1. Analysis on Food Industry

Safety is the most important criterion for considering an investment. If an investor is not

assured about the return of his investment, he will reject it ignoring how high the

profitability may be. Investors are always willing to put their money in the pocket of those

businessmen who are masters in making profit, not those who are in struggle or can not

show their business potentials. But how can we recognize a good business?

Let’s investigate the factors that differentiate good businesses from poor ones through the

concept of good will. If a company has good will, it means that the value of the business as

going concern is greater than the value of its separate tangible assets. Thus we can take

good will as the key explanation for the difference between market value and book value of

a firm. Good will is created by good relationships between the business and its customers

through building up a reputation (maybe through words of mouth) for quality of its products

and/or services, responding promptly and helpfully to the customers’ needs and its

qualified and professional staff, and the like. Although good will can not be counted,

touched or seen, its role in contributing to the success of a business is extremely

important. Good will can urge customers to buy the company’s products, attract suppliers

to provide the company with goods competitive in quality and price, and persuade

creditors as well as investors to pour their money in the company. Goodwill can take

several forms such as famous brands, geographical advantages in distribution, superior

technology, well-qualified staff or managers, monopolistic competency and the like.

Take a look at financial condition of the 4 show-off companies above (See table 3), we can

see that they have incredibly high rates of MV/BV compared with the average rate of the

broad industry. General Mills’ rate is 62.9, those of Campbell Soup, Kellogg and Best

Foods are 25.8, 16.9 and 14.0 respectively while that of the industry average is 11. Not all

companies in the market have good will to support their business and that should be a

major explanation for superiority of such companies like Campbell Soup or General Mills.

One thing should be worth looking at is that the Food Industry is one of the most profitable

businesses now. It is ranked high in profitability among S&P500 by higher rate of Return

On Investment, compared with S&P500 average and this trend is predicted to continue

due to economic growth prospect and thus higher income per capita, in most of developing

countries. Investors can foresee a bright future for Food Industry as the demand for instant

food is increasing in accompany with daily heighten living standard in many developing

countries. In new industrial countries such as Brazil, Korea, Singapore etc, there appears

increasing needs for high quality instant food and other processed food because of

increasing high income per capita, time constraint for of industrial life, health care problem,

or some times just a new lifestyle. In spite of the fact that the Asian financial crisis has

caused a lot of difficulties to many businesses in this area, a vibrant food market in Asia

can be predictable for recent recovery of most countries. It is clearly a chance for investors

to raise their money through investments in the Food Industry.

However, these common features of the Food Industry are probably not a satisfying

explanation for distances between MV and BV of specific companies. We’d better take the

specific cases for a meaningful explanation.

7.1.3 5.2.2. General Mills, Inc. (GIS)

GIS is one of the leading companies in the food industry. Its branches have reached

almost all the continents in the world from Brazil in Southern American to Singapore,

Malaysia and others in ASEAN. In the current biggest markets of such products, Europe

and Northern America, GIS holds a leading position in both products and total sales

volume. The reputation of GIS has been built up from its own business philosophy: We will

build our leading brands. GIS markets some of the most recognized and trusted brands in

the food industry. Today, its brands hold the number 1 or 2 in a variety of attractive grocery

categories. The company uses consumer tests to determine how the products stack up,

and considers the brands superior only when at least 60 percent of consumers agree. GIS

always pays attention to refreshing its brands through improvements in product quality.

Innovative marketing focused on unique product attributes also builds brands.

The image of GIS in public is brightened with introducing golf star Tiger Woods, one of the

most famous sport stars worldwide, as the newest spokesperson of the traditional brand

Wheaties whose heritage is currently introduced as the “Breakfast of Champions”. GIS

also takes the advantages of the world wide communication computer network for

enriching its brands by designing the popular Betty Crocker Web site. In 1999, GIS plans

include meaningful improvements on several key brands such as Super Moist cakes and

Rich & Creamy frosting, and a variety of other brand-focused marketing programs. In

marketing news, whole grain oats and cholesterol reduction helped Cheerios post 5

percent retail volume growth in 1998. In 1999, the company will deliver strong health

messages on Total cereal, which provides 100 percent of the daily value of folic acid and

is an excellent source of Calcium. General Mills is now well known as a reliable provider of

high quality food worldwide.

Recent reported operation results of GIS' investments and joint ventures all over the world

can strongly illustrate the successful business that GIS' management is running. Big G

cereals led U.S performance, with sales up 11% to $2.44 billion and total unit volume up

8%. Excluding incremental volume from acquired brands, Big G unit volume grew nearly

1% in 1998. U.S convenience foods volume grew 16%, with double digits gains recorded

by both traditional snack business and Yoplait Colombo yogurt operations. Foodservice

volume was up 6% for the year. International unit volume, including the proportionate

share of joint venture results, grew 15% in 1998. International earnings increased 35% to

exceed $15 million after tax. Cereal Partners Worldwide (CPW), a joint venture with

Nestle', led international performance, posting 19% unit volume growth and strong profit

progress. Snack Ventures Europe (SVE), a joint venture with PepsiCo, recorded an 11%

unit volume gain in 1998, led by strong performance in Spain and Russia. Unit volume

grew 4% for International Desert Partners (IDP), a joint venture in Latin America with

Bestfoods14.

14 http://biz.yahoo.com

Look at the referent table, we can assess thoroughly the business status of GIS with the

industry’s average through some ratios. In valuation ratio group, P/E ratio of GIS is

currently 23.87, nearly 3% less than the industry’s average showing the better efficiency in

making profit. GIS’ beta is nearly half of the industry’s (0.36 compared with 0.65), this

stability is attractive with risk-averse investors.

It’s more attractive if we look at other ratios of profitability, management effectiveness and

efficiency. In the last 5 years, GIS shows much higher profitability, management

effectiveness and efficiency than the industry’s average, which means that the company is

now under a good management status. GIS' ratios of management effectiveness and

efficiency can be called excellent. It’s not very easy to maintain such high ratios in a period

characterized by mainly economic recession and crisis everywhere. Your investment

should be very promising if you choose GIS.

Above all else, a strong market position, which implies a prospective sustainable

development of the company, may be the most important criterion of when you consider

an investment and GIS offers you that reliability. It is ranked number 8 in market

capitalization among the first 50 companies in such a fiercely competitive market like Food

processing. Does it contribute any thing to the reputation of GIS? Yes, it indicates that GIS

is really a big company holding a large part of the “cake”. Although its book value is only

$169.2 million, the second smallest size in the first 50, it still can produce as high profit and

sales as others, much larger in size. That’s something called ‘efficiency’, showing the well-

managed business of GIS.

In addition, foodservice is catching up with big opportunities as total foodservice sales

exceed $300 billion and are growing faster than food industry sales as a whole.

Foodservice operators and customers alike are interested in leading consumer brands, so

these outlets represent excellent growth opportunities for GIS. The company is one of the

worldwide leading companies in foodservice. General Mills’ foodservice unit volume has

grown at a strong pace in recent years, including a 6% gain in 1998. It posted 12% growth

in yogurt volume by capitalizing on the ruling of USDA approving yogurt as a protein in

school lunches. It also increased its number-2 market share in cereals with a 12% gain in

bowl pack volume and sustained the market leadership position in dessert mixes. GIS is

targeting a broader penetration of our products in vending machines and other foodservice

outlets. New growth platforms such as its Colombo frozen refreshment center, a

foodservice retail concept that features frozen yogurt drinks in addition to soft-served

yogurt, are tested and expected to raise the company’s profitability rapidly in the near

future. Can you be reluctant for an investment in GIS being promised with such

opportunities? Probably not!

For all of the above analysis, we should come to a primary notice that GIS’ stocks are

highly chased in the stock market, thus resulting in high offering stock price, much higher

than its initial book value. That can be a major cause for the distance between MV and BV

of GIS for a long-run view.

The last but not least is the ongoing share repurchase program of GIS. Under this

program, the company made open-market purchases totaling 6.2 million shares in fiscal

1997 and 7.5 million shares in fiscal 1998. These purchases totaled nearly $900 million

and reduced stockholders' equity represents $190.2 million of the company $2,491.9

million in total capital for 1998. In spite of its high leverage ratios compared with the

industry average and even the S&P 500, the company continues to enlarge the rate of

debt per equity in order to utilize the benefits of leverage. As more and more successful

operating results come, the company's trend of repurchasing its treasury stock can still

maintain its healthy financial position.

Currently, General Mills ' publicly issued long-term debt carries ratings of "A2" (Moody's

Investors Services, Inc.) and "A+" (Standard and Poor's) in the United States and "P-1

(middle)" in Canada (Dominion Bond Rating Service). It is the company’s policy of

repurchasing its stock that causes a push up the demand for GIS’ stock. Every investor

believes that no other can know about the company as well as its manager. Thus, when he

rushes to the market chasing his own company’s stock, a conscious man should raise this

thought: The company must have a great potential or its profitability may be higher shortly.

And as the effect of this rumor, the investors all point their attention at the company’s stock

resulting in a high GIS’ stock price for sudden exceeding demand over supply. This

decision of the company should be a suitable reason for recent increases in GIS' stock

price. Stock price of GIS has totally been increasing considerably over recent 15 years and

can be showed in the exhibit below.

Exhibit 3 - General Mills' 15-year stock price fluctuation compared with that of S&P500

(Source Yahoo Finance SEC Filing General Mills)

Along with the continuously lessened BV of GIS through the share repurchasing program,

the side effect of increasing stock price in the market enlarges further the gap between MV

and BV. This should be the most persuadable explanation for the high rate of MV/BV of

General Mills.

Base on the analysis above, we should conclude that not alone operation results but

reputation and other financial policies have contributed to the high MV/BV rate of GIS so

far.

5.3 CAMPBELL SOUP Company (CPB)

Campbell Soup Company, ranked number 4 in the Food Industry for market capitalization,

is most famous for its prepared wet soup and noodle product but it also takes its part in

other products and service like sauces, biscuits and confectionery, and foodservice.

Germany is the largest commercial soup market outside the United States and German

eat six times more soup per capita than Americans. New England Clam Chowder is one of

the company’s top-selling soups in Japan. Campbell’s soups are found in 93% of

American households, which is more than either cold cereals, coffee, or bath tissue.

Campbell employs 41,000 people at 100 facilities in 22 countries over 6 continents.

Soup is the company middle name and the center of its product portfolio. From the flagship

Red & White brand, to brands like Chunky and Swanson broth in the U.S., Erasco in

Germany and Liebig in France, soup represents its greatest strength and its biggest

global opportunity. Recent acquisition of premium refrigerated Stockpot soups provides

another strong growth platform. The vision of the company is to own the world’s soup

bowl. Beyond soup, the company owns some of the biggest brands in their categories,

including V8 and V8 Splash juices, Pace picante sauce and salsa, Franco-American SpaghettiOs pasta in the U.S. and Homepride sauces in the United Kingdom.

Godiva Chocolatier, Pepperidge Farm and Arnotts in Australia complement the brand

line-up with some of the world’s highest quality and best tasting cookies, crackers and

confections. Godiva is recognized from New York to Tokyo as the ultimate in luxurious

chocolate. Pepperidge Farm cookies and crackers are distinctive with leaders like Milano and Chocolate Chunk Classic cookies and Goldfish snack crackers in the U.S. In

Australia, Arnotts holds a market leading 56% share with such products as Shapes flavored crackers, Tim Tam chocolate biscuits and Kettle chips.

Actually, food prepared away from home accounts for more than 50% of consumers’ food

dollars… and it is growing. Campbell’s soup is wanted to be within arms reach wherever

food is served – from traditional restaurants and university dining halls to supermarket

delis, quick service restaurants and airport eateries. Campbell’s is also being put on the

menu with new branded soup kettles15.

Look back at 110-year history of Campbell, which now serves as a symbol for most of

Americana, we can recognize how much efforts have been made to build up the image of

the company. Not only its marketing but also other charity activities build up the reputation

of Campbell. Advertising started right in the beginning of this century with a magazine print

ad boasted 21 varieties, each selling for a dime. Campbell entered into radio sponsorship

in 1930’s and when television made its way to American homes in the 1950’s, Campbell

introduced TV commercials.

Today, Campbell remains one of the leading advertisers in the U.S. And generations of

Americans have grown up on Campbell-sponsored programming including Lassie, Peter

Pan, and the famous Campbell Playhouse radio series. The Campbell Soup Foundation is

the philanthropic arm of the company to support non-profit organizations that make a

difference in the lives of people anywhere the company has operations. The way

Campbell’s products have been marketed also goes deep into American history.

Celebrities from Ronald Reagan and Johnny Carson to Jimmy Stewart and Donna Reed

have served as spokespersons for various Campbell products. The line is now continued

with the famous U.S skating “Dream Team” of Nicole Bobek, Michelle Kwan and Tara

Lipinski as partners in the National Advertising Campaign. These beloved sport stars are

“polishing” the brands of Campbell, making its public image staying alive to the customers.

People are familiar with the name of Campbell through its various activities, thus its

products as well, and it contributes a lot to the success of the company, ensuring a bright

prospect for the company.

The variety of its product range and its worldwide famous brands make the name of

Campbell one of the most reliable businesses all over the world. Investors are not reluctant

to invest their money into such a famous company like Campbell. This takes its part in

explaining for high Campbell stock price. However, similar to the case of GIS, we should

look more carefully at business operation results and financial policy of Campbell to find

the most persuadable explanation for the company show-off.

15 http://www.generalmills.com

The operation results of Campbell Soup can be summarized as some ratios in the referent

table. As looking at those ratios, we can see that Campbell is one of the leading

companies in the Food Industry. In the valuation ratio group, Campbell’s P/E is 23.93,

9.76% less than the industry’s average, showing better efficiency in making profit.

Campbell’s Beta is 0.52 compared with 0.65 of the industry’s average, which means that

the company is more stable from market changes.

Campbell even looks more desirable in the dividend ratio group with dividend 5-year

growth rate of 12.45%, 1.03% higher than the industry’s average. But the superiority of

Campbell is showed in the profitability, management effectiveness and efficiency ratio

groups. Gross Margin, Operating Margin, Net Profit Margin, ROA, ROE, ROI and Net

Income/Employee ratios of Campbell are all much higher than the industry’s average

illustrating Campbell’s mastery in managing its business. This is probably the most

important reason for investors to decide buying Campbell stock. The ratios of financial

strength group shows that it is using more and more high leverage like other big

companies in the industry. We will return to this issue later on with a clearer analysis.

We shall surf over recent operation results of Campbell for a closer view of analysis. Sales

in 1998 increased 1% to $6.7 billion from $6.61 billion in 1997. The grow was due to a 4%

increase from volume and new products, 2% from higher selling price, 1% from

acquisitions, offset by a 6% decrease due to currency and divestitures16. All the wet soup

businesses of Campbell in U.S, Canada, Germany, France, Australia and Japan continued

to post volume gains. Biscuit and confectionery sales declined slightly in 1998 due to the

divestiture of Declare in June and the adverse impact of currency, particularly the

weakness of the Australian dollar. The foodservice sales increase in 1998 was led by

Pace products, Prego entrees and V8 Splash17. Operating Earnings – Segment operating

earnings in 1998 increased 7% compared to 1997. Excluding the 1998 and 1997

restructuring charges, operating earnings increased 10% in 1998. These numbers,

accompanied by the previous analysis, can clarify the superior position of Campbell in the

Food Industry. This is a big contribution to the increase of Campbell stock price.

16 http://www.campbellsoup.com/financialcenter/1998ar/management_results.htm17 http://www.campbellsoup.com/financialcenter/1998ar/management_results.htm

However, the most important explanation for Campbell’s extraordinary high rate of MV/BV

should come from the company’s recent financial policy. In June 1998, Campbell

announced a program to repurchase up to $2 billion of the company’s share over the next

three years. The authorization includes a continuation of Campbell’s strategy of

repurchasing 2% of its shares annually. Beyond that, Campbell plans to buy back an

additional $500 million of its shares in fiscal 1999, which begins in August18. To that date,

the company has bought back $1.9 billion of its shares under the earlier program. This is a

strong action of Campbell toward utilizing its annual excessive cash flows. “This new share

repurchase program reflects strong confidence in our strategic growth plan. Share

repurchases, which reduces our cost of capital, will continue to be an important element of

our long-term drive to build shareowner wealth”, said Dale F. Morrison, Campbell’s

President and CEO.

With this program, the company’s stock price tends to increase due to the relationship

between demand for and supply of the stock. As Campbell stock are highly repurchased,

along with its more and more successful operation results, the market price of the

company rises and rises higher while its book value decreases. The result of these inverse

trends is the high and higher rate of MV/BV. We shall conclude that Campbell’s high rate

of MV/BV is partly caused by its share repurchase program, which is from the company’s

strategic financial decision. This should be the most persuadable explanation for the

extraordinary show-off of the company. The exhibit below is an illustration for Campbell’s

stock price broad changes over the most recent 13 years.

{Not alone the company’s business, other effects could take parts into the company show-

off.

18 http://www.campbellsoup.com/financialcenter/press/060298b.htm

Exhibit 4 - Campbell Soup’s 13-year stock price fluctuation compared with S&P500

(Source Yahoo Finance SEC Filing Cambell Soup)

7.1.3.1

7.1.3.2 Table 5. Ratio Comparison

Ratios GIS CPB Industry Sector S&P 500

P/E High – Last 5 yrs 33.89 43.35 44.17 48.02 44.39

P/E Low – Last 5 yrs 18.04 15.26 15.55 17.81 14.5

Beta 0.36 0.52 0.65 0.88 1

Price to Book (MQR) 74.17 38.22 10.62 10.81 9.14

Dividend Yield - 5 Year Avg. 3.2 0.1 2.12 1.93 1.67

Dividend 5 Year Growth Rate 4.76 12.45 11.42 12.1 9.54

Sales - 5 Yr. Growth Rate 3.26 0.33 6.42 6.94 17.02

EPS - 5 Yr. Growth Rate 0.62 24.05 9.44 20.48 19.73

Capital Spending - 5 Yr. Growth Rate -10.36 -6.92 3.16 6.66 17.67

LT Debt to Equity (MRQ) 10.13 2.68 1.92 0.95 0.68

Total Debt to Equity (MRQ) 13.14 6.41 2.74 1.44 0.99

Gross Margin - 5 Yr. Avg. 59.5 45.45 38.24 49.3 48.18

EBITD - 5 Yr. Avg. 16 21.31 13.22 17.83 22.09

Return On Equity - 5 Yr. Avg. 103.09 36.71 25.03 32.57 22.81

Source: Yahoo Finance Market Guide – Comparison Report for Cambell SoupCo./ General Mill

5.4 KELLOGG Company

Kellogg Company operates in a single industry – manufacturing and marketing grain-

based convenience food products, including ready-to-eat cereal, toaster pastries, frozen

waffles, cereal bars and bagels, throughout the world.

A graph describing stock price of Kellogg during 1985-1999 shows a slightly upward trend.

There had been MV boom in the period June 1997-June 1998, which was followed by a

sharp drop in August 1998. First months of 1999 witnessed a small recovery in MV

although the 1998's business result was not so satisfying as that of previous year. Kellogg

MV is almost above SP500 all the time. Therefore, reasons for high MV/BV ratio and high

positive show-off value should be sought in long-run rather than on-spot factors.

Kellogg

SP500

Exhibit 5 - Kellogg market value vs. SP500(Source: Yahoo Finance SEC Filing Kellogg )

Look at Table 6, Beta factor of the company is 0.61, less than that of food industry (0.65).

The company is not much elastic to market change. This is not only attributable to low-risk

nature of the industry but also the low systematic risk of company as well. A high market

value over book value is an explainable thing to Kellogg in this situation.

Kellogg

7.1.3.3 Table 6. Ratio comparison

Ratio Kellogg Industry Sector S&P 500

Beta 0.61 0.65 0.88 1.00

Dividend yield - 5y average 2.30 2.12 1.93 1.67

Return on assets – 5y average 11.99 7.50 11.23 8.34

Return on equity – 5y average 41.72 25.03 32.57 21.81

Total debt to Equity 2.53 2.74 1.44 0.99

Source: Yahoo Finance Market Guide – Comparison Report for Kellogg Co.

Although the 1998's business result was not as good as expected, Kellogg's ratios about

management effectiveness and efficiency show optimistic assessment on the company.

Comparing with ratios of food industry and of SP500, we can understand the

attractiveness of Kellogg securities in stock market. The high MV/BV ratio and high

positive show-off value are explainable. We can see the market attitude toward Kellogg by

citing opinion of Timothy Ramey, an analyst of Deutsche Bank Securities, in his 2 page

Company Report on Kellogg Company on January 7, 1999. "A BUY rating was maintained

with a price target of $50 per share. The company announced the appointment of Jacobus

Groot to the head of the company's Asia-Pacific division. The 1999 and 2000 EPS

estimates remained unchanged at $1.50 and $1.70, respectively"19.

There was an event happening in first two months of 1999, which was considered

influencing MV of the company. That was appointment to the CEO of Kellogg Co. and

heads of Asia-Pacific and of North America divisions. Young people, valuable experience

in consumer goods (from P&G and Coca-Cola) and MBA degree are one of strong

features of new assignees. Their arrivals have increased the market positive attitude

toward Kellogg.

19 Yahoo Finance Research Abstract – Kellogg Co.

Kellogg is holding position #1 in the global ready-to-eat cereal category with an estimated

38 percent share of worldwide volume. Additionally, the company is the North American

market leader in the toaster pasty, cereal/granola bar, frozen waffle and pre-packed bagel

categories.20 Their market share of the ready-to-eat cereal category was approximately 33

percent in North America, 43 percent in Europe, 43 percent in Asia-Pacific and 61 percent

in Latin America.21 Enjoying the prime market position, the company's strong performance

is certainly ensured. So is investor's confidence on Kellogg.

The total 1998 dividend payment to $0.92 per share, a 5.7 percent increase over the

period-year payment of $0.87. During 1998 Kellogg repurchased 6.3 million shares of the

company's common stock.

8. 6. Learning effects

At the point of completion of this analysis project work, we are happy with the practical

knowledge gained through the working process. The lessons in the class have been partly

relearned through data collecting, processing, and analysis. At last, we are probably aware

of how to conduct corporate stock evaluation basing on various sources of information

available.

We now know that interrelating aspects that affect a corporate stock price are the most

useful learning we gained. In our analysis, we recognized that not only operation results

and financial condition of a company but also other effects such as the company’s good

will, reputation, market transactions and even rumor etc. can contribute to the changes in

the company’s stock price. For that, corporate stock evaluation should take into account all

those effects as a broad view to get accurate results.

20 Yahoo Finance SEC Filing Kellogg

21 Kellogg Annual Report of 1998

A side effect is that we had a good chance to investigate specific features of the industries

in which our analyzed companies run their business, as well as the history of those

companies. In our project work, those are Food Industry and Electrical & Electrics with

several famous names Campbell Soup, Kellogg, General Mills, Intel and the like.

We dedicate our many thanks to Dr.Venkatesh, who assigned us such an interesting work

and plenty of useful instructions. We are eager for proper feedback to make our

succeeding better.

student project sample

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