Financial Management International Currency Exposures Case Study

Question: You have been hired as a business consultant to analyze XYZ Company. While your client is very successful, he/she does not really understand financial numbers and desires your help. Your client wants to pay you to do the homework and due diligence on his behalf before he invests his money. Your job to answer the question Is XYZ Company the right company to invest in? Please be prepared to defend your recommendation, either way (whether you are recommending for or against investment in your clients chosen firm.)The Process:Since this is your first consulting job for this client, you want to do it right. After all, this could lead to additional analysis opportunities for you down the road. After benchmarking with other financial consultants, and viewing some of their work, you feel you need to provide the following information to your client:1. Brief history and description of the companys operations, background, primary product/service offerings, customers, business sector(s), etc.2. Brief bios of top executives and board of directors3. Financial analysis of XYZ Company based on data provided from the last five year financial reports (Annual Reports and 10Ks). (note: you must choose a publicly-traded corporation in order to be able to access this data)4. Report on the strengths and weaknesses of any financial trends of XYZ Corporation5. Market performance (stock price/returns over the last five years relative to the SP 500 index and major competitors.6. XYZ Companys competitors who are they, size, background, etc.7. XYZ Companys industry what are trends in this industry?8. Your assessment of companys prospects going forward and investment recommendation (buy, sell, or hold the stock)9. Based on your research, where do you think XYZ Company is going to be in three to five years? Provide the valuation on 3 to 5 years going forward. To help answer this question you need to know the company as well as the industry. Make sure you provide and support the assumption s used to project the companys future. Answer: Introduction The following report represents the highlights of a company, listed in United States examining the overall financial performance of the company for the purpose of investment. Company selected for presenting the report is The Coca Cola deals mainly in soft drinks and beverage products currently trading at a price of $43.49 in the New York Stock Exchange (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Companys background The Coca Cola Company founded in the year 1886 by John Stith in Georgia, United States, is one of the largest nonalcoholic beverage producing companies. The organization has seven major operating system based on geographical region including, Europe, North America and Asia Pacific. Majority of the companys revenue generates from North America region from the sale of finished products while other regions operates in production and sale of syrups and beverage concentrates (Coca-Cola Global: Soft Drinks Beverage Products., 2016). The principal value of business for the company is its consumers preference, to build true and strong relationship with the present and prospect customers. Companys consumers include supermarkets, discounters, movie theatres, multiplexes, restaurants, hotels, caf amongst others. Its primary products are non- alcoholic beverage that includes Coca Cola, Sprite, Diet Coke, Fanta and similar other soft drinks (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Top Executives and Board of Directors At present the companys Board Chairperson and Chief Executive Officer is Muhtar Kent having firm commitments to the morals and values to make the company sustainable and profitable in the competitive industries (Coca-Cola Global: Soft Drinks Beverage Products., 2016). James Quincey, president as well as Chief Operating Officer of the company since the year 2013, responsible for organizations operating segments worldwide. Under his leadership, one of most profitable operating segments of the company strategically expanded its portfolio across the world. Other Board of Directors of the company includes Herbert Allen, Ronald Allen, Marc Bolland, Ana Botin and Barry Diller (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Discussion Financial analysis The sales revenue of Coca Cola during the financial year was around US$44.29 million which increased from US$35.12 million in the year 2010. The company owns more than 500 brands in the nonalcoholic beverage products. Its approximate sales unit in the year 2015 was 2,055 million while in the year 2014 it was around 2,003 million (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Figure 1: Sales revenue graph (Source: Coca-Cola Global: Soft Drinks Beverage Products., 2016) The companys equity shareholding reflects average of US$25 Billion in the fiscal year 2015 to US$31 Billion in the year 2010. Apart from that that organizations current assets shows decent growth between the years 2015 and 2010 with the value of US$ 33.4 Billion, US$ 32.99 Billion, US$31.3 Billion, US$ 30.33 Billion, US$ 25.5 Billion and US$ 21.58 Billion respectively. Additionally, the organizations gross margin percentage was at an average of 60% since the fiscal year 2010 to the year 2015 whereas its operating margin percentage was between 20% - 22% in the last five years. Profitability ratios of the Coca cola Company reveal the perpetual growth and sustainability as a largest and renowned brand for soft drinks and refreshments (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Profitability ratios 2010 2011 2012 2013 2014 2015 Tax Rate percentage 16.74 24.52 23.06 24.84 23.60 23.31 Net Margin percentage 33.63 18.42 18.78 18.32 15.43 16.60 Average Asset Turnover 0.58 0.61 0.57 0.53 0.51 0.49 Return on Assets percentage 19.42 11.21 10.86 9.74 7.80 8.07 Average Financial Leverage 2.35 2.53 2.63 2.71 3.04 3.53 Return on Capital (Equity) percentage 42.32 27.37 28.00 26.03 22.36 26.31 Return on Capital Investment percentage 26.69 14.87 14.27 12.58 9.86 10.63 Interest Coverage ratio 20.43 28.43 30.75 25.79 20.31 12.22 Table 1: Profitability ratios (Source: Created by author) Strength and weakness of financial trends The company is one of the largest producers and distributors of soft drinks and refreshments with the highest rank in consumers safety fetched a rating of A++ for having strong financial position in the economy. Companys core strengths are awareness of brand, powerful distribution network, strong customer relationship, premium quality products, strong operating systems and great leadership. With respect to the financial information, companys tremendous growth in sales at around 10% within last five years whereas its cash fund shows US$ 12.8 Billion in the year 2011 and US$ 7.31 Billion in the year 2015. The difference in cash fund reflects the dividend distribution to the investors as well as employment of funds in the business to expand and incorporate new projects (Coca-Cola Global: Soft Drinks Beverage Products., 2016). On the other hand, the companys notable weakness is its poor management in the water segment and fluctuations in foreign currency. As the company is in manufacturing of beverages and refreshment products, water is its essential ingredient as a raw material. Water is a significant element for the welfare of consumers as well because it is an inadequate resource in various regions of the world hence the company has to face some challenges for overusing it. Apart from that, company operates in many regions across the world around 200 countries and therefore, incurs its financial activities in different foreign currencies like euro, Japanese yen and Mexican peso. In the year 2014, the organization derived its revenue of around $26.2 Billion from the business operation outside the country United States. Hence, the rise and fall in currency exchange rates affect the foreign exposure with respect to foreign exchange loss (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Market performance Currently the stock of Coca Cola (KO) is trading at $43.48 with a negative change of 0.03 to 0.07 percent indexes in New York Stock Exchange. In the year 2015, increase in Earnings Per Share (EPS) was 13.5% while the payment of dividend increased by 11.1% compared to the year 2014 (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Figure 2: Market growth (Source: Coca-Cola Global: Soft Drinks Beverage Products., 2016) There was also increase in the Book value per share and free cash flow between the year 2010 and 2015. In the year 2010, the company had $7,317 Million free cash flow funds which increased to $8,209 Million in the year 2014 though it declined by small amount in the year 2015 to $7,975 Million. Moreover, there has been constant increase in the marketable securities of the company in the past five years amounted to US$ 4,269 Million in 2015, US$ 3,665 Million in 2014, US$ 3,147 Million in 2013, US$ 3,092 Million in 2012 and US$ 144 Million in 2011. Considering the companys current strategy on expansion of business operation, the management and Board of Directors have planned to invest US$ 3 Billion as a long term investment to support the new project for its sustainable growth (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Competitors of the company Coca Cola have several major competitors in the beverage industry like PepsiCo, Inc., Tree Top, Inc., Citrus World, Inc., Dole Food Company, Inc., Monster Beverage Corp., and similar other companies. Companys competition is in the sector of nonalcoholic beverages since it is one of the highest competitive sectors (Coca-Cola Global: Soft Drinks Beverage Products., 2016). One of the major competitors is PepsiCo, Inc., an American company that deals in manufacturing and distribution of food, snacks and beverage having its headquarters in United States. The company falls under the industry of Beverages and food processing and was formed in the year 1965 because of merger between Pepsi- Cola Company and Frito- Lay. The company generated sales revenue more than $ 1 billion and the products are distributed in more than 200 countries and is considered as the second largest company in the world. In the year 2015, its operating income reported at amount of US $ 8.353 Billion while net income was reported at US $ 5.452 Billion and total assets at US$ 69.667 Billion in the year 2015 (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Another major competitor of The Coca Cola Company is Monster Beverage Corp., which is manufactures and distributes energy drinks, fruit drinks, lemonade and other nonalcoholic beverage. It holds around 35% of the total energy drink market in United States having its net sales amounted to $645.4 million. Other competitor list of The Coca Cola Company includes Citrus World, Inc, which is a largest citrus drinks seller (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Companys industry and trends In the present scenario, Companies in beverage industries experiencing changes that will enhance the product quality, production process of the companies and consequently increase the sales revenue. Companies will take steps in investing their substantial funds in research and development process to increase the quality contents of the health drinks and other beverages. Companies like PepsiCo, Coca Cola are taking steps to produce the drinks with organic ingredients concerning about the health of the consumers with respect to pure, safe and healthy drinks containing less calories, sugar content or sodium element (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Another trend of the industry are concerning in the beverage industry is about reformulation of the products to serve health benefits to the consumers. Reformulation would take place only if it is required to do so in context to right amount of calories content, sugar content or any other ingredients that is harmful to the health of customers (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Most of the companies are setting the trends of serving drinks in smaller bottles, cans or even paper cans to save the wastage and providing convenience of carrying the bottles. These containers also reduce the cost of packaging and serve hygienic system to supply drinks to the consumers. Additionally, smaller bottles means less quantity of drinks and apparently less consumption of calories. Association of American Beverage in the year 2014 assured to cut the content of calories by 20% until the year 2025 (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Companys growth and investment recommendation Despite of several challenges and limitations the companys financial results reflected positive impact on the effective net pricing and net revenues ignoring foreign currency exposures. There was a rise in its operating revenue by 3% while in operating profits by 6% in the year 2014. Examining the past five years data, the company experienced some decline in its financial position in the year 2015 because of some operational changes and investment in the portfolio. However, that year was called transitional year and the company hope to obtain benefits in near future. Currently, Coca Cola Company has around 30% of market share in the universal beverage industry and is expected to include $90 Billion to the market cap by the year 2020. In the beginning of the year 2014 companys market cap was $150 Billion whereas the market cap in current market is $187.66 Billion and is expecting to grow the same by 6.9% in future years (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Considering all the financial information it is highly recommended to invest in Coca Cola (KO) securities and hold the same. Analyzing the future expected growth and past optimistic financial trends it is advised not to go short on the companys stocks and shares. Further, the company is also regular in dividend payment so it is beneficial for the investors to go long and hold the securities to earn maximum returns (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Companys position in next three years On examining the financial information of The Coca Cola Company, it can be said the company shows an immense growth and stability in the beverage industry since its incorporation. Growth in net profits, operating profits, significant increase in market cap shows an effective exposure in future years. Though the companys financial results in the year 2015 displayed decline in revenues with small percentage but if the foreign exchange fluctuations is ignored then there was increase in the year 2015 too. Therefore, the company is expected to grow significantly by 5%, 6% and 8% in the years 2016, 2017 and 2018 respectively (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Integrated valuation 2015 2016 (+5%) 2017 (+6%) 2018 (+8%) $ Million Net sales 6,346.10 6,663.41 6,726.87 6,853.79 Cost of sales (4,018.70) (4,219.64) (4,259.82) (4,340.20) Gross profit 2,327.40 2,443.77 2,467.04 2,513.59 Operating expenses (1,855.20) (1,947.96) (1,966.51) (2,003.62) Restructuring costs (54.00) (56.70) (57.24) (58.32) Operating profit 418.20 439.11 443.29 451.66 Table 2: Three years valuation (Source: Created by author) It has been assumed that the growth of the companys performance in recent years will be 5% to 8% (approximately) and is expected to earn operating profits amounted to $451.66 Million. Hence, it is recommended to invest in the companys securities to earn maximum returns other than the dividend incomes (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Recommendation With the view of companys growing trends and impact on its performance with respect to finance, product quality, customer relationship and investors benefits. The market cap of the company in 2014 was $150 Billion and in the year 2015 it was around $187 Billion with an increase of $37 Billion. Apart from that share price of the company in last five years was at an average of $ 31.00 and $45.00 which reflects a steady growth in its price. Therefore, the client is recommended to invest and buy the securities and hold for certain period until 2020 which expects to provide decent returns and incomes. However, the amount of investment is totally on the budget and available funds of the client but it is advised to invest 40% to 50% of the funds in the securities KO. This is because there should always be diversification in investment portfolio to minimize risk and maximize returns and incomes (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Conclusion The report represented on the analysis and evaluation of the selected company Coca Cola which United States based largest beverage producer and distributor. The purpose of the report was to examine the different aspects of the financial information and to examine whether it is the appropriate and profitable company to invest funds. It is noted that the company has a strong financial position in the year 2015 as well as in past years with respect to revenues, profits, asset valuation, dividend payment and earnings per share. The growth percentage reflected 3 to 6 % in net revenues and operating profits of the company. Hence, the client is advised to invest the funds in the companys shares and hold for three to five years as the financial trend shows growth in the companys value which eventually provide good returns to its investors. The company is expected to have a significant growth in its turnover and profits by the year 2020, so it is a good opportunity to make investment in its s ecurities (Coca-Cola Global: Soft Drinks Beverage Products., 2016). Bibliography List Bntrix, A. S., Lane, P. R., Shambaugh, J. C. (2015). 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