FINC 626 – Final Team Project
David (Dave) Ballantine
Papamagatte (Magu) Diagne
Jing (April) Hu
Xuehong (Echo) Wang
1
Gazprom (OGZPY)
Gazprom (OGZPY) is a global energy company. It’s major business lines are geological
exploration, production, transportation, storage, processing and sales of gas, gas condensate
and oil, sales or gas as a vehicle fuel and generation and marketing of heat and electric power.
Gazprom holds the world’s largest natural gas reserves. The company is among Russia’s five
largest oil producers and it is the largest owner of power generating assets in the country.
These assets account for 17 percent of the total installed capacity of the national energy
system. With oil and gas accounting for 70% of export income, the fall in oil prices has caused
an increase in the interest rate to 17 percent. According to the World Bank, Russia loses about
$2 billion in revenues for every dollar fall in the price per barrel of oil. Similar to
overproduction pressure faced by OPEC, Russia will not decrease oil production for fear of
losing market share. Since OPEC will not decrease production, Gazprom faces a potential
decrease in their worldwide market share.
1.1 Stock Price Valuation
We predicted stock price targets using the DDM, 3-Stage, PE and PB valuation models. Most of
the model inputs are obtained from zacks.com and yahoofinance.com. Long term growth rates
and CAPM beta are calculated from a linear regression model. On February 11 2015 the stock
price was $4.69 per share. Book value per share is 256. This value is high because Gazprom
executed a massive stock buyback program, greatly decreasing the number of outstanding
shares. Decreasing the number of outstanding shares increases the price to book value ratio.
Gazprom pay dividends at $0.33 per share. Short term return on equity (ROE) is 8.89%. Long
term ROE data is not available so we assumed 7%. Short and long term growth rate data is not
available. We assumed Gazprom with grow with the industry short term and long term growth
rate of 3% and 10.07% respectively. We estimated a forward 12 month earnings per share of 3.
The CAPM beta of 1.89 is calculated from a regression model. The corresponding long term
required rate of return is 16.20%. PE, PB and PEG multiples are 1.89, 0.2 and 0.24 respectively.
Prices targets range from five to sixty dollars. The PB evaluation price target is $60.21. Due to
the stock buyback program this price is an order of magnitude larger than the reference stock
price. We did not select such a high target price but use the result as an indication that the
stock price will likely increase. The PE evaluation price target is $3.77. We do not expect the
stock price to drop to this price. DDM evaluation price target is $5.11. Initially the 3-Stage
valuation price was negative. By increasing the stage 3 growth rate to 12% the 3-stage
evaluation price is $9.65. At $9.65 the expected return is 105% with an 89% alpha. The stock is
a strong buy.
1.2 Stock Options Strategy
Our main concern with Gazprom is volatility and uncertainty. The international energy market
as whole has behaved erratically in the past several months. OPEC’s decision to increase its oil
supply to a surplus had caused oil prices to fall. This has direct implications on Gazprom,
because they are also an oil company. Therefore, the uncertainty about future oil prices plays a
large part in our uncertainty for the future stock price of Gazprom. The stock price is likely to go
up or down. If oil prices fall, the stock will probably decrease. If oil prices increase, then the
stock will likely increase. Furthermore, there is geopolitical instability in the Russian region.
There has been recent political instability in Ukraine for example. Investors are less likely to
invest their capital in international markets where there are political, economic, and social
problems.
Therefore we have hedged our bets against uncertainty. We believe that there is a good chance
of profitability if the strategy is correct. We have chosen the Long straddle option strategy. This
is the combination of buying a call and a put at the same time at the same strike price and same
expiration. According to our calculations, the cost premium for this option would be $1.65. This
is probably a too high estimate for the premium. We could not find data on Gazprom options,
so we tried to use other similarly priced companies and make our estimates for Gazprom. We
believe the premium would probably be closer to $1. As the stock price moves more than $2 in
either direction, we will make a profit. But if the stock price stays within $1 in either direction of
the stock price, we will lose money. To be specific, the break even points are about $3.80 on
the low end, and $5.80 on the high end.
Therefore, our long straddle option position would be a good hedge against stock price
volatility that is likely for Gazprom. Please see the profit/loss graph below which indicates our
long straddle position.
2
Goldcorp (GG)
Goldcorp is a gold producer headquartered in Vancouver, British Columbia, Canada. The
company employs more than 16,000 people worldwide, is engaged in gold mining and related
activities including exploration, extraction, processing and reclamation. Goldcorp’s operating
assets include five mines in Canada and the U.S., three mines in Mexico, and two in Central and
South America.
2.1 Stock Price Valuation
The stock price of Goldcorp is $22.83, and the book value per share is $23.93. The trading price
is less than its book value. The P/B ratio is less than 1. It tells investors that the asset value may
be overstated, or that the company is earning a very poor return on its assets. If the former is
true, investors are well advised to steer clear of the company’s shares because it is highly
possible that the asset value will face a downward correction by the market, leaving investors
with negative returns. If the latter is true, there is a chance that new management will prompt
a turnaround in prospects and give strong positive returns. Even this happens rarely, a company
trading at a price less than book value can be broken up for its asset value, earning
shareholders a profit.
The short-term ROE is negative, clearly reflecting that the company does not perform well
recently, and that it is experiencing a capital loss. However, the world gold market is becoming
better. So we predict that the Goldcorp will have a turnaround in the future. We estimate that
the long-term ROE will be 2%. Given the good trend, investors can consider buying the stocks of
gold market. The short-term earnings growth rate is 10%, which is relative high. Even though
the return is not ideal, compared to the condition of previous years, it becomes better. The
whole market is recovering, and the company has a bright prospect. However, we cannot say
that the happy tendency will last for a long time. With the consideration of uncertainty in the
future, we expect the earnings growth rate would drop to 5.7%. We do the regression between
the annual return of the stock and the return of S&P500, and then we obtain the beta, which
equals to 0.65. The beta is less than one, meaning that GG has a lower volatility than the
market. We also do the regression to get the required rate of return, which is 7.56%. It is
relatively high and an ideal return. Investors have high possibilities to earn their money back.
We calculated the price multiples to get three price valuations. We get 32.61 for PE, 0.13 for
PB, and 1.45 for PEG. The three numbers are in accord with what we said above: the company
had a poor earning during the past 12 months. We predict that the dividend growth rate will be
constant in the short-term, and float in the long-time period. Therefore, we use DDM to
estimate the intrinsic value for short time and use 3-stage model to evaluate the long-term
intrinsic value. The result of DDM is $25.35, and the consequence of 3-stage model is $21.86.
The current price is about $23. It reflects the company’s intrinsic value well. The gold market is
expected to recover. The future stock price may increase. Since the current price matches the
value of the Goldcorp, it has a great probability that the price won’t change a lot. However, due
to the recovery of the market, the earnings of the company are expected to increase a lot. The
target PE and PB are $22.83 and $3.04, representing better earnings. The alpha is 3.5%.
Investors can earn 3.5% more than the industrial level. According to the analysis above, our
target price for Goldcorp is $25.35, and the expected return is 11%. Moreover, we offer the
company a rating of B, and recommend investors to buy its stock.
2.2 Stock Options Strategy
Based on the Goldcorp data from Yahoo! Finance the stock price of GG has an increasing trend
and the gold industry has a promising future. So we predict that the stock price of Goldcorp and
also gold industry will go up in the following days. So we decided to choose protective put
strategy to save more money.
Following summarizes the protective put strategy position:
With the stock price decreasing by $5 step by step, there is a minimum return with put option
of -20.6%. When price is lower or equal to $18.54, the return with put strategy is stable at this
level. This position gives us a guarantee that we won’t lose much money when stock price is too
low. Also, when price is higher than or equal to $28.54, the return with put strategy is positive
and there is little evidence between returns with put option and returns without put option,
which is 1.3% to 1.4%. Therfore we conclude that the influence of this protective put strategy
at higher price level is relatively small. It is a good signal of our strategy.
Following is the price/returns graph which indicates the protective put strategy:
We observe from the above graph that there is a positive relationship of the stock price and
the returns. In addition, when price is lower than $23.54, the relationship line of stock price
and return w/put is horizontal, which indicates a steady level. And after that, the return w/put
line and return w/o put line nearly duplicate with little difference, which reflects the figures in
the chart above. With this protective put strategy, we guarantee our return at a minimum level
when price continues declining. And we will lose less when price goes up. That’s why we choose
the protective put strategy for Gordcorp.