For this assignment, I chose to analyze King Digital Entertainment PLC, developer of the Candy Crush saga.
Looking at the CEO’s letter and the analyst estimations, we can forecast a great outlook for the firm. Although management points towards intense competition in the marketplace, sales and earnings are growing healthily. The competition comes from low barriers to entry, yet King is an established player with a strong brand and is delivering on its results. Analysts are almost all bullish on the stock. According to the most recent data available, Stifel, Deutsche Bank and Barclays all believe the stock will outperform. Only RBC Capital Markets downgraded the stock from outperform to sector perform, signaling normal prospects for the company. Therefore, analysts are slightly less positive about the stock now than they were 90 days ago, with the mean rating falling from 2.46 to 2.33. According to both Yahoo and Reuters, no analyst has issued an underperform or sell opinion on the stock. The mean price target is 21.08, representing a potential upside of 6.28% from the current stock price.
The company’s P/E ratio (TTM) is 9.61. The 52-week price range for the stock is 10.68–23.48, with the stock currently trading at 17.21, thus trading in the middle of the range.
The biggest holders of the stock are Bellaria Holding SARL, which owns c.a. 141M shares representing 43.8% of the company and Melvyn Morris, owning 11.1% of the shares. Notably, the CEO Mr. Zacconi owns 9.7% of the shares. I would evaluate the quality of corporate governance as good, notably because no party holds a controlling stake – thus everyone has a say in how the company is run. Furthermore, all directors and executive officers collectively own 18.3% of the shares, making their interests well aligned with those of the shareholders.
Looking at the firm’s financial statements, we can see that the company has a very strong financial position, notably with almost 1 billion dollar in cash, corresponding to roughly 20% of the market cap of the firm. The financial health is thus very strong, especially since LT debt is non-existent, being more than ten times less than the amount of cash available. There is thus no liquidity problem. The profitability of the business is great with a strong cash flow from operating activities ($661m) which allowed a high dividend payout ($363m), notably higher than peers. However, we also notice that some stock has been sold for roughly the same amount, thereby decreasing total shareholder returns (which is the sum of dividends and share buybacks). Analysts however expect this amount to be non-recurring: in 2013, the company already paid out more than $285m in dividends without issuing stock. This should continue as this business has very low capital expenditures (CAPEX) and therefore generates a strong free cash flow. Notably, the operating margin is 33.85% and return on equity are 102.73%, which is higher than peers like Zynga. Finally, the efficiency of the company is improving with DSO decreasing from 58 in 2012 to 33 in 2014, thereby showing an improved working capital management.
KING's Annual Report 2014. (2015, January 1). Retrieved April 18, 2015, from http://investor.king.com/files/Form-20-F_v001_r027z2.pdf
Morningstar – King Financials. (2015). Retrieved April 18, 2015, from http://financials.morningstar.com/ratios/r.html?t=KING®ion=usa&culture=en-US