Pfizer Inc. is one of the largest pharmaceutical companies in the world. It has its headquarter in New York City and its research headquarter in Connecticut. It develops and produces medicines and vaccines for a wide range of medical disciplines i.e.Immunology, oncology, cardiology, diabetology/endocrinology, and neurology.
The Coca-Cola Company is the largest manufacturer, retailer and marketer of soft-drink in the world. It is an American company which produces a carbonated soft drink. It has a presence in over 200 countries around the globe and approximately 1.6 billion serving of Coke and Sprite are consumed per day.
Wal-Mart Stores is an Ameriacna multinational retail corporation which operates discount stores and warehouse stores around the world. It has over 11,000 stores in 27 different countries and it uses a mass purchase and distribution mechanisms to lower down the cost of the products it offers. Low wages, pioneered distribution system, considerable bargaining power over the suppliers has enabled Wal-mart to maintain a low price on their products. They sell general merchandise, grocery items, meat and poultry items, baked goods, pet shops etc.
Intel Corporation is an American multinational company and is one of the largest semiconductor chip manufacturer in the world. It also makes motherboard chipsets, network interface controllers and integrated circuits, flash memory, graphic chips, embedded processors etc. Intel serves many different end markets i.e. personal computers, communications, industrial automation, military and other electrical equiptment.
Based on the profitability ratios i.e. ROS, ROE and ROA, we can see that Pfizer has the highest returns among all the selected companies i.e. it seems to be the most efficient to earn returns for its shareholders. Similarly, Intel and Coca Cola seems to be earning a higher return when compared to the industry averages (the value in the brackets are industry averages). Pfizetr and Coca cola have the highest average collection period among the group which shows that they have not been able to collect their receivables quickly. This increases the risk of bad debts as well as the cash of these companies are frozen for a longer time i.e. it may cause short-term liquidity problems. Wal-mart has the lowest collection period which shows its efficiency and strategy to reduce the cost of the company.
Wal-mart seems to be utilizing its assets most efficiently to generate income for it shareholders i.e. it has a high total asset turnover ratio. Coca cola and Intel have not been able to utilize their assest to their maximum potential which increase the cost of these companies. Pfizer is the most inefficient among all the companies with the lowest assets turnover ratio. All the selected companies have a good TIE ratio which shows that they have been able to generate enough revenue that can easily meet their interest obligations.
Apart from Coca Cola, all other companies seem to have a lower price-earnings ratio compared to the industry average. The PE ratio shows the amount of investment required to earn 1 unit of return i.e. lower the PE higher will the return for the same amount of investment. Intel and Wal-mart seem to have the lowest PE ratio among the selected companies.
IntrinsicValueusingDividend Discount Model
We can calculate the required return for a stock using the CAPM model which states that the required return on a stock is the sum of the risk-free rate and the risk premium over the risk-free rate and the market rate multiplied by the beta of the stocks. It is given by the equation:
RequiredRateofReturn (Ke) = Krf + ( Km – Krf) * β
Using equation, we have calculated the required rate of return of all the stocks. Intel has the highest rate since it has the highest beta among the selected companies whereas Wal-mart has the lowest rate since it has the lowest beta among the group. Now, using this rate we can calculate the intrinsic value for these stocks using the constant growth model. Then we have calculated the growth rate of dividends using the past three years of dividends for all the companies. The table below shows the calculation process.
The intrinsic value of the stock can be calculated using the constant growth model i.e. using the growth rate and the required rate of return.
The table above shows the Intrinsic value of the stock calculated using the constant growth model. The intrinsic value reveals that except Wal-mart, all other stocks have a market price which is on average 3-4 times greater than their intrinsic values. Normally, the market price of stocks are two times their intrinsic value. So, the intrinsic value of the stocks reveal that the stocks have been overpriced in the market i.e. they are trading at a higher price than their actual value. The stocks of Intel seem to be the least overpriced among the selected companies.
Wal-mart seems to have an intrinsic value which is almost four times its market price. This error may have been caused due to the assumption of the constant growth model because the dividends distributed by Wal-mart are not growing at a constant rate i.e. 15.82 %. Using only three years of data to calculate the growth rate could be another reason for this error i.e. it may not show the actual growth of dividends. Due to this reason the intrinsic value of Wal-mart is higher than its market price.
IntrinsicValueusing PE Model
Before calculating the intrinsic value of the stock using the PE mode, we must calculate the growth rate in earnings for these stocks. The Table below shows the growth rate calculation of these stock using the earnings per share of the past three years. We have used a three year period to bring a consistency in the calculation.
The above table shows that the earnings of Intel and Coca-Cola has decreased in the past three years i.e. explaining the negative growths for these companies ( -2 % and -9 % respectively). Wal-mart and Pfizer have a positive growth rate but the growth rate of Pfizer seem to be too high i.e. 46 %. Since, we have only used three years of data for the calculation of the growth rate, it has ignored the previous data and may not have provided an accurate result.
We can calculate the intrinsic value of the stocks using the PE model as shown in the table below:
Based on the table above, we can see that the stock of Wal-mart seems to be fairly priced since its intrinsic value and market value are almost identical i.e. 78.89 and 78.69. The stocks of Intel seem to be slightly underpriced as the market price seem to be less than its intrinsic value i.e. 29.99 >25.96. On the other hand, the stocks of Coca cola seem to be slightly overpriced because its market price is greater than its intrinsic value i.e. 38.33 < 41.31. But the intrinsic value of Pfizer seems to be very high as compared to its market price. The reason for this may be a high growth rate of earnings.
CalculationofReturn, Standard Deviation and CV
We have used the year end prices of the stocks for the past five years as well as the dividends received to calculate the return on the stocks. The table below show the returns, standard deviation of returns and the coefficient of variation (CV) for the stocks.
Based on the above table, we can see that Intel has provided the highest return but a high standard deviation means that it is a risky stock because its prices fluctuate the most among all the selected companies. The coefficient of variation of 1.21 shows that to earn a one unit of return, an investor must assume the risk of 1.21 units. Hence, this is the riskiest stock in the group and will be good for a risk-taking investor.
On the other hand, Coca cola has a fairly high rate of return i.e. 16.16 % and its has the lowest standard deviation as well as the lowest coefficient of variation. This shows that Coca cola provides an opportunity to earn a high level of return taking lower risk. Hence, Coca cola is a good choice for any investor.
Wal-mart seems to have the lowest rate of return among the group and it also has a low standard deviation. But looking at the coefficient of variation, we can see that it has a higher CV as compared to the CV of Pfizer that has a considerably higher return (i.e. 0.98 > 0.74). So, this shows that an investor will have to take a higher risk to earn a lower return if they invest in Wal-mart. Hence, Wal-mart is not a good option for an investor.
The beta, standard deviation and CV of the stocks provide almost similar results. Intel seems to be the riskiest stock among the four stocks having the highest beta, standard deviation and CV. But, as per the beta, Wal-mart seems to be the least risky stock. Whereas Coca cola seems to be the least risky stock as per the standard deviation and the CV. This difference in result may have been due to the use of annual returns to calculate the standard deviation and the CV. The use of daily return would have provided a more accurate result.
Based on all the above calculation, we can see that intel seems to be a very good stock. It has been providing a fairly high rate of return and it seems to be slightly underpriced as per the PE model. But it is the riskiest stock among the group and so a risk-taking investor should purchase the stock of Intel.
Coca cola seems to be another good stock. It also seems to be providing a fairly high rate of return but taking a much lower risk as compared to other stocks. It has the lowest standard deviation and CV among the group. It seems to be slightly overpriced in the market at the moment which market, its negative growth in earnings, its low asset turnover ratio and high PE ratio can be a point of concern for the investors.
Pfizer too seems to be providing a high rate of return to its investors. It also has a low PE ratio which means investors can a higher return. It has the lowest assets utilization and the high collection period among all the stock in the group. It has also limited its profit potential and efficiency. But a good growth in the earning for the past few years provides good hope for the future.
Wal-mart seems to be providing a low rate of return to its investors. It has the lowest beta among the group. But its CV is considerably higher as compared to others that mean investors will have to take a higher risk to earn the same return when investing in Wal-mart. A high growth of dividends in the previous years as well as the lowest collection period is a good signal for the investors.
Hence, Intel and Coca cola seem to be the best options for an investor among all the selected stocks.
Growth, Profitability, and Financial Ratios for Wal-Mart Stores Inc (WMT) from Morningstar.com. (n.d.). Retrieved from http://financials.morningstar.com/ratios/r.html?t=WMT®ion=usa&culture=en-US
Growth, Profitability, and Financial Ratios for Intel Corp (INTC) from Morningstar.com. (n.d.). Retrieved from http://financials.morningstar.com/ratios/r.html?t=INTC®ion=usa&culture=en-US
Growth, Profitability, and Financial Ratios for Pfizer Inc (PFE) from Morningstar.com. (n.d.). Retrieved from http://financials.morningstar.com/ratios/r.html?t=PFE®ion=usa&culture=en-US
Growth, Profitability, and Financial Ratios for Coca-Cola Co (KO) from Morningstar.com. (n.d.). Retrieved from http://financials.morningstar.com/ratios/r.html?t=KO®ion=usa&culture=en-US