Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
FIN 640: Investment Analysis & Portfolio Management
Final Project: XYZ Tech Company: Investment Analysis Report
By: Kelly A. Giambra
Southern New Hampshire University
Module 9: July 1, 2018
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Introduction:
As a new investment manager of XYZ Tech Company, the CEO has requested an
investment analysis report. Using the provided information and investment parameters, as well as
financial database research, a report was prepared on the companies: Apple (AAPL), Caterpillar
(CAT), Consolidated Edison (ED), Northern Trust (NTRS), and Macy’s (M), all which are the
companies that XYZ would like to invest in. The analysis includes compiled data spreadsheets, a
complete portfolio, and a justification of investment strategies for these investments.
I. Company Description and Market Analysis:
Apple, Inc. (AAPL)
Industry: Technology Hardware, Storage & Peripherals
Apple, Inc. (AAPL) is the world’s largest consumer electronics and personal computer
business with headquarters in Cupertino, California (CA). The Company, headed by Steve Jobs,
Steve Wozniak, and Ronald Wayne first began in the late 1970’s by selling hand-made personal
computer kits, but in recent years shifted focus to consumer electronics such as the iPhone, iPad,
and iPod (NASDAQ, 2018). AAPL has consistently developed new hardware, software, systems,
and services to provide its customers with the best possible user experiences. The Company invests
significantly in marketing and advertising which they believe are essential in the sale of its
products.
AAPL has retail store locations around the world with five reportable operating
segments of the Americas, Europe, Japan, Asia-Pacific, and Retail (NASDAQ, 2018). However,
the Company still faces a number of risks such as changing global economy, changes in consumer
demand, global competition, and supply chain disruptions (NASDAQ, 2018).
Caterpillar, Inc. (CAT)
Industry: Machinery
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Caterpillar, Inc. (CAT) is a Delaware formed corporation with 2017 sales and revenues
totaling over 45.46 billion, and is the world’s leading manufacturer of construction and mining
equipment, diesel fuel and natural gas engines, gas turbines and diesel-electric locomotives
(NASDAQ, 2018). The Company mainly operates within three segments of constructio n
industries, resource industries, and energy and transportation (NASDAQ, 2018). CAT also
provides financial and other related services through their financial products segment (NASDAQ,
2018).
Consolidated Edison, Inc. (ED)
Industry: Multi-Utilities & Regulated Electric
Consolidated Edison, Inc. or Con-Ed (ED) is a holding company that was incorporated in
New York State (NYS) in 1997 and owns all of the outstanding shares of common stock of
Consolidated Edison Company of New York, Inc. (CECONY), Orange and Rockland Utilities,
Inc. (O&R), Con Edison Clean Energy Businesses, Inc., and Con Edison Transmission, Inc.
(NASDAQ, 2018). Con Edison’s primary business activities consist mainly regulated electric, gas
and steam delivery, as well as O&R’s operations of regulated electric and gas delivery businesses
(NASDAQ, 2018). The Clean Energy businesses operations consist of renewable and energy
infrastructure projects and provide energy related products and services to customers (NASDAQ,
2018).
Northern Trust Corporation (NTRS)
Industry: Capital Markets
Northern Trust Corporation (NTRS) is a financial services company that was first formed
as a holding company in 1971, and provides asset servicing, fund administration, asset
management, fiduciary and banking solutions for corporations, institutions, families, and
3
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
individual consumers worldwide (NASDAQ, 2018). The Company conducts businesses through
several subsidiaries including The Northern Trust Bank and has offices throughout Canada,
Europe, the Middle East, and the Asian-Pacific (NASDAQ, 2018). As of December 31, 2017,
Northern Trust had total assets of 138.6 billion and stockholder’s equity of 10.2 billion NASDAQ.
(2018). The Bank is the corporation’s primary subsidiary headquartered in Chicago and was
founded in 1889 (NASDAQ, 2018).
Macy’s Inc. (M)
Industry: Multi-line Retail
Macy’s, Inc. (M) is a Delaware formed corporation since 1985 and had been in the
department store business since 1830 (NASDAQ, 2018). The Company operates about 850 retail
stores in 44 states, the District of Columbia (DC), Guam, and Puerto Rico (NASDAQ, 2018). As
of February 2018, Macy’s operations were conducted through Macy’s, Bloomingdale’s,
Bloomingdale’s Outlet, Macy’s Backstage, Blue mercury, and Macy’s China (NASDAQ, 2018).
The Company also has global operations through Bloomingdale’s in Dubai, United Arab Emirates,
Al Zahra, and Kuwait (NASDAQ, 2018). Macy’s sells a wide range of merchandise such as
clothing, accessories, cosmetics, home décor and furniture, and other consumer goods (NASDAQ,
2018).
A. Financial Markets
Ai. Five-Year Performance Of The Domestic Economy Relative To The Financial Markets
According to The Congressional Budget Office (CBO), it is projected that for the periods
of 2018 to 2028, the domestic economy (U.S.) will follow a cyclical path with economic growth
expecting to rise especially in 2018 (CBO, 2018). This will be followed by a slow down a few
years afterward, then finally rise to match the maximum sustainable growth outcomes during the
final years of the projection. According to the CBO, demand is expected to exceed supply which
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
will push up inflation and interest rates as well as a possible decline in employment rates (CBO,
2018). The growth of real GDP is expected to be relatively strong this year which will moderate
in future years. In the CBO’s economic projections, real GDP will expand by 3.3 percent in 2018
and by 2.4 percent in 2019 mostly driven by consumer spending, business investments, and federal
spending (CBO, 2018). It is expected that the 2017 tax act on incentives to work, save and invest
will raise GDP from the periods of 2018 to 2028. In addition, it is likely that there will be an
increase in wage and inflation rates leading to the Federal Reserve (The Fed) raising rates to about
2 percent by the end of 2018. During 2018 and beyond, investment outlook will be one of both
higher risks and lower returns. As a result, the market outlook will require the need for investors
to remain disciplined and globally diversified with more realistic expectations of returns as well
as lower-cost strategies (CBO, 2018):
Source: CBO's April 2018 report The Budget and Economic Outlook: 2016 to 2022
2016
2017
2018
2019
2020
GDP
Gross Domestic Product (GDP)
In Billions
Percentage change, annual rate
Real GDP
In Billions
Percentage change, annual rate
Labor
Unemployment Rate,Age 16+ %
Labor Force Age 16+ (Millions)
Percentage change, annual rate
Interest Rates %
10-Year Treasury Note
3-Month Treasury Bill
Federal Funds Rate
Income, Personal
Billions of dollars
Compensation of Employees, % of GDP
Billions of dollars
Wages and Salaries % of GDP
2021
18625
2.8
19387
4.1
20362
5.0
21369
4.9
22247
4.1
23079
3.7
16716
1.5
17093
2.3
17613
3.0
18118
2.9
18472
2.0
18754
1.5
4.9
159
1.3
4.4
160
0.7
3.8
162
0.8
3.3
163
0.9
3.6
165
0.9
4.1
166
0.7
1.8
0.3
0.4
2.3
0.9
1.0
3.0
1.9
1.9
3.7
2.9
3.1
4.1
3.6
3.8
4.2
3.8
4.0
15929
85.5
9979
53.6
8085
16417
84.7
10295
53.1
8340
17284
84.9
10828
53.2
8795
18327
85.8
11432
53.5
9304
19304
86.8
11985
53.9
9759
20206
87.6
12484
54.1
10160
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Currently the three largest U.S. financial markets indices include the Dow Jones Industria l
Average (DJIA), the S&P 500, and the NASDAQ, which are utilized for benchmarking to tell how
the market is performing. As of May 17, 2018, the Dow is currently 24,820 points, up 49.56 points
or 20 percent (Google Finance, 2018). The DJIA consists of 30 large-cap blue-chip companies
which include Apple and Caterpillar as a part of the group. The NASDAQ is the market capweighted index of over 3,300 common equities listed on the NASDAQ stock exchange which
includes all NASDAQ listed stocks that are not derivatives, preferred shares, funds, exchangetraded funds (ETFs) or debentures. As of May 17, 2018 the NASDAQ is currently at 7414.50
points, up 13 points or 17 percent (Google Finance, 2018). The S&P 500 is the third major index
of 505 stocks issued by 500 of the largest companies with market caps of about 6.1 billion and a
leading indicator of U.S. equities, and a market value weighted index and most common
benchmark for the U.S. stock market. As of May 17, 2018 the S&P was at 2724.92 points, up 2.50
points or .098 percent (Google Finance, 2018).
Top 3 U.S. Financial Indices
December 1, 2013 to May 17, 2018
30,000.00
25,000.00
20,000.00
15,000.00
10,000.00
5,000.00
0.00
12/1/2013
Close
Close
Close
S&P 500
Dow Jones
Nasdaq
12/1/2014
12/1/2015
12/1/2016
12/1/2017
5/17/2018
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Aii. Five Year Sector Market Performance, Industry Performance And Current Trends
Apple (AAPL) Sector Market Performance:
3/1/2018
12/1/2017
9/1/2017
6/1/2017
3/1/2017
12/1/2016
9/1/2016
6/1/2016
3/1/2016
12/1/2015
9/1/2015
6/1/2015
3/1/2015
12/1/2014
9/1/2014
6/1/2014
3/1/2014
200.00
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
12/1/2013
Price
Apple, Inc. Stock Prices (AAPL)
December 1, 2013 to May 17, 2018
Date
AAPL is traded on the NASDAQ and stock prices as of May 17, 2018 were currently at
$187.98 per share and down by 11 percent, which is likely to cause investors a loss (Google
Finance, 2018). APPL is also expected to lose market share in China due to lack of demand for
iPhones thus gross margins and operating margins are at risk in this Country in the short run
(Delventhal, 2018). APPL has recently experienced decelerated sales growth in China despite
significant gains from 2013 to 2018 trending upward in the U.S. (Delventhal, 2018). However, on
the longer-term, the firm indicates growth due to the App Store and Apple Music and these
segments are likely to increase P/E (Delventhal, 2018). Other risks to the Company include the
global trade war and imposed tariffs of 100 billion on Chinese imports may negatively impact
APPL since many of their products are assembled there (Delventhal, 2018).
Caterpillar (CAT) Sector-Market Performance:
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
3/1/2018
12/1/2017
9/1/2017
6/1/2017
3/1/2017
12/1/2016
9/1/2016
6/1/2016
3/1/2016
12/1/2015
9/1/2015
6/1/2015
3/1/2015
12/1/2014
9/1/2014
6/1/2014
3/1/2014
180.00
160.00
140.00
120.00
100.00
80.00
60.00
40.00
20.00
0.00
12/1/2013
Price
Caterpillar, Inc. (CAT) Stock Prices
December 1, 2013 to May 17, 2018
Date
Caterpillar’s (CAT) stock price as of May 17, 2018 was 154.47 up by 44 percent (Google
Finance, 2018). Revenues have gradually increased from 2016 to 2017 from 38.5 to 45.5 billio n,
and though earnings per share (EPS) were -0.11 in 2016, there was an increase in 2017 to 1.27
which is likely to climb in future reporting years (Rains, 2018). Stock prices have also increased
over the periods 2013 to 2017, however, there was a slight decline in May 2018 which may be of
some concern to investors. CAT is also trading with a Forward P/E of 15.81 which is a slight
discount compared to the construction and mining industry average of 15.85 (Rains, 2018).
Consolidated Edison, Inc. (ED) Sector- Market Performance:
Consolidated Edison Inc.’s (ED) stock price as of May 17, 2018 was 74.13 down by .58
percent which is concerning for investors (Google Finance, 2018). Though stock price history
from 2013 to 2017 has increased the price has continued to fall in May for several days in a row
which analysts are currently recommending this company as a sell candidate (Stockinvest, 2018).
Analysts report that ED signalizes a slower rising rate, but may also be an early warning sign about
a possible trend shift (Stockinvest, 2018). Due to trends being broken there will now be resistance
at the bottom line of the trend at $75.64 (Stockinvest, 2018). A reaction back to this level may
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
hold a second chance to get out before further falls. However, this stock is usually traded at good
volume and with minor daily changes with risk being relatively low. For the last week, the stock
had a daily average volatility rate of 1.28 percent (Stockinvest, 2018).
3/1/2018
12/1/2017
9/1/2017
6/1/2017
3/1/2017
12/1/2016
9/1/2016
6/1/2016
3/1/2016
12/1/2015
9/1/2015
6/1/2015
3/1/2015
12/1/2014
9/1/2014
6/1/2014
3/1/2014
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
12/1/2013
Price
Consolidated Edison, Inc. (ED) Stock Prices
December 1, 2013 to May 17, 2018
Date
Northern Trust (NTRS) Sector-Market Performance
Northern Trust’s (NTRS) stock price as of May 17, 2018 was 109.29 up by 1.02 percent
(Google Finance, 2018). NTRS had first quarter 2018 EPS of 1.58 and a favorable increase from
1.10 in 2017 (Zacks, 2018). Revenue growth and other credit metrics are showing significa nt
improvement and on an upward trend with 2016 revenues of 4.96 billio n increasing to 5.36 billio n
in 2017 (Zacks, 2018). However, operating expenses have continued to increase which could drag
down performance. The future outlook appears to be promising and management expects realizing
250 million in expense run rate savings by 2020 which on a combined basis will create roughly 55
million in annual net savings to be fully realized by first quarter of 2019 (Zacks, 2018).
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
3/1/2018
12/1/2017
9/1/2017
6/1/2017
3/1/2017
12/1/2016
9/1/2016
6/1/2016
3/1/2016
12/1/2015
9/1/2015
6/1/2015
3/1/2015
12/1/2014
9/1/2014
6/1/2014
3/1/2014
120.00
100.00
80.00
60.00
40.00
20.00
0.00
12/1/2013
Price
Northern Trust (NTRS) Stock Prices
December 1, 2013 to May 17, 2018
Date
Macy’s (M) Market Performance:
Macy’s (M) stock price as of May 17, 2018 was 34.48 up by 3.95 percent (Google Finance,
2018). Macy’s has a trailing twelve months of P/E ratio of 7.9 percent which is pretty favorable
since the P/E for the S&P 500 is currently about 21.1 percent and also compares favorably with
the market sector which is 30.1 percent, indicating that the stock is undervalued compared to its
peers (Zacks, 2018). Macy’s is not only considered by analysts to be a good choice for value
investors but revenues are expected to remain steady over the next 6 years with EPS likely to
increase during this same time period (Zacks, 2018). In fact, over the past year, the industry has
outperformed the broader market (Zacks, 2018).
3/1/2018
12/1/2017
9/1/2017
6/1/2017
3/1/2017
12/1/2016
9/1/2016
6/1/2016
3/1/2016
12/1/2015
9/1/2015
6/1/2015
3/1/2015
12/1/2014
9/1/2014
6/1/2014
3/1/2014
60.00
50.00
40.00
30.00
20.00
10.00
0.00
12/1/2013
Price
Macy's (M) Stock Prices
December 1, 2013 to May 17, 2018
Date
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Industry Performance:
The technology industry (AAPL) pace of revenue growth in the first quarter of 2018
increased to 11.2 percent, year over year, above the industry average. Sales growth accelerated to
6.06 percent year over year but remained below industry average (CSI Markets, 2018). The farm
and construction equipment industry (CAT) pace of revenue growth in the first quarter of 2018
increased to 15.47 percent above industry average where revenue fell by 6.32 percent and overall
ranking has declined compared to the previous quarter (CSI Markets, 2018). The regulated electric
industry’s (ED) pace of revenue growth in the first quarter of 2018 increased to 4.87 percent year
over year above the industry average, and revenue grew by 7.23 percent (CSI Markets, 2018). The
investment services industry (NTRS) revenue growth in the first quarter of 2018 decelerated to
16.49 percent year over year but still remained above industry average, while revenue grew by
3.97 percent (CSI Markets, 2018). The department and discount retail industry’s (M) pace of
revenue growth in the first quarter 2018 accelerated to 6.68 percent year over year above industry
average, though revenue fell by 3.45 percent (CSI Markets, 2018).
Aiii. Impact Of The Five-Year And Current Macroeconomic Data On Asset Prices
The following data projects stock valuations for AAPL, CAT, ED, NTRS, and M:
Apple (AAPL) Stock
Fiscal year ends in September.
USD in millions except per share data.
Revenues
Cost of Goods Sold
Selling, General & Administrative Expenses
Research and development
Operating Income
Net Interest Expenditure
Pre-Tax Income
Taxes
Net Income
2016
2017
2018
2019
2020
2021
215,639 229,234 238,403 247,939 257,857 268,171
131,376 141,048 166,882 173,558 180,500 187,720
14,194 15,261 40,529 42,150 42,546 44,248
10,045 11,581 10,813 11,197 11,005 11,101
60,024 72,925 30,992 32,232 34,811 36,203
1,456
2,323
1,890
2,106
1,998
2,052
61,372 64,089 29,103 30,126 32,813 34,151
18,412 19,227
8,731
9,038
9,844 10,245
42,960 44,862 20,372 21,088 22,969 23,906
Earnings Per Share
7.85
8.60
3.81
3.99
4.32
4.51
Shares Outstanding
5,471
5,217
5,344
5,281
5,312
5,296
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Caterpillar (CAT) Stock
Fiscal year ends in December
USD in Million except per share data
Revenues
Cost of Goods Sold
Selling, General & Administrative Expenses
Research and development
Operating Income
Net Interest Expenditure
Pre-Tax Income
Taxes
Net Income
Earnings Per Share
Shares Outstanding
2016
2017
2018
2019
2020
2021
38,537
4,686
45,462
31,049
5,177
1,951
1,905
1,905
9,236
1,101
1,177
804
192
612
8,059
3,339
4,720
47,280
33,096
8,038
1,928
6,146
1,139
5,007
1,502
3,505
49,172
34,420
8,359
1,917
6,392
1,158
5,234
1,570
3,664
51,139
35,797
8,438
1,922
6,904
1,149
5,755
1,727
4,029
53,184
37,229
8,775
1,919
7,180
1,153
6,027
1,808
4,219
-0.11
1.27
5.91
6.17
6.79
7.11
592
594
593
594
593
593
28,309
Consolidated Edison (ED) Stock
Fiscal year ends in December.
USD in millions except per share data.
Revenues
Cost of Goods Sold
Selling, General & Administrative Expenses
Research and development
Operating Income
Net Interest Expenditure
Pre-Tax Income
Taxes
Net Income
Earnings Per Share
Shares Outstanding
2016
2017
2018
2019
2020
2021
12,075 12,033 12,514 13,015 13,535 14,077
3,088
2,625
8,760
9,110
9,475
9,854
3,269
3,303
2,127
2,213
2,233
2,323
0
0
0
0
0
0
5,718
6,105
1,627
1,692
1,827
1,900
702
737
720
728
724
726
5,016
5,368
907
964
1,103
1,174
698
472
272
289
331
352
4,318
4,896
635
675
772
822
14.39
15.95
2.09
2.21
2.54
2.70
300
307
304
305
304
305
Northern Trust (NTRS) Stock
Fiscal year ends in December.
USD in millions except per share data.
Revenues
Cost of Goods Sold
Selling, General & Administrative Expenses
Research and development
Operating Income
Net Interest Expenditure
Pre-Tax Income
Taxes
Net Income
2016
2017
2018
2019
2020
2021
4,962
3,473
844
84
645
182
463
139
324
5,375
3,763
914
95
699
340
359
108
251
5,590
3,913
950
90
727
261
466
140
326
5,814
4,070
988
92
756
301
455
137
319
6,046
4,232
998
91
816
281
535
161
375
6,288
4,402
1,038
92
849
291
558
167
391
Earnings Per Share
1.42
1.10
1.43
1.40
1.64
1.71
Shares Outstanding
228
228
228
228
228
228
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Macy's (M) Stock
Fiscal year ends in January.
USD in millions except per share data.
Revenues
Cost of Goods Sold
Selling, General & Administrative Expenses
Research and development
Operating Income
Net Interest Expenditure
Pre-Tax Income
Taxes
Net Income
2016
2017
2018
27,079 25,778 24,837
16,496 15,621 15,152
8,256 8,265 8,131
0
0
0
2,327 1,892 1,554
363
367
311
1,964 1,525 1,243
589
458
373
1,375 1,068
870
2019
2020
2021
25,830 26,864 27,938
18,081 18,805 19,557
4,391 4,433 4,610
0
0
0
3,358 3,627 3,772
339
325
332
3,019 3,302 3,440
906
990 1,032
2,113 2,311 2,408
Earnings Per Share
4.19
3.47
2.85
6.89
7.56
7.87
Shares Outstanding
328
308
305
307
306
306
The impact of the five-year and current macroeconomic data came in higher than expected.
However, trades in China likely to be impacted on the trade front as a result of additional tariffs
up to USD 100 billion worth of Chinese imports and a rapidly transforming global market (CBO,
2018). The U.S. economy is still the largest in the world and represents about 20 percent to the
total global output which is still larger than China (CBO, 2018).. The U.S. economy is dominated
by services-oriented businesses in areas such as technology, financial services, healthcare and
retail (CBO, 2018). The U.S. is the second leading manufacturer in the world and a leader in auto,
aerospace, machinery, telecommunications, and chemicals (CBO, 2018). The five-year impact of
current macroeconomic data on asset prices shows that it continues to recover from a period of
turmoil due to a mix of factors (CBO, 2018).. These factors include low interest rates, a hike in
mortgage lending activity, high consumer debt, and lax government regulations which had led to
a recession in 2008 (CBO, 2018). The economy continues to recover, however, there are still
concerns over challenges going forward.
B. Company Valuation
Bi. Key Ratios And Comparison To Peers And Industry:
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Apple (AAPL)
Industry: Consumer Electronics
Debt & Coverage Ratios
Debt/Assets
Debt/Equity
Current Assets/Current Liability
EBITDA/Interest
Debt/EBITDA
Cash Flow Ops/Total Debt
Firm
Ind Avg
0.33
0.79
1.46
20.07
1.55
0.72
0.32
1.94
59.34
2.03
1.14
As of May 2018, AAPL had a debt/assets ratio of .33 percent which represents the amount
of financed assets lasting longer than one year. The ratio increased from .25 in March of 2017 to
.28 in March 2018 to 33 in May 2018, which is a sign that they may be using an increasing amount
of debt to fund their operations (CSI Market, 2018). AAPL’s debt/equity ratio as of May 2018 was
.79 percent higher than the industry average of .32 percent (CSI Market, 2018). The current ratio
is 1.46 which is lower than the industry average of 1.94 (CSI Market, 2018). The current ratio of
1.46 generally indicates good short term financial strength and is ranked lower than 82 percent of
the 2227 companies in the global industry (CSI Market, 2018). Apple’s EBITA/Interest ratio is
20.07 percent which is lower than the industry average of 59.34 and ranked lower than 60 percent
of the 1906 companies, where the Debt/EBITDA ratio is 1.55, lower than the industry average of
2.03 and a sign that the Company spends less time paying off debt than other competitors in the
industry. AAPL’s cash flow ops/total debt is .72 percent, where the industry average is 1.41 and
an indicator that there may not be enough cash in hand to pay off its debt (CSI Market, 2018).
Caterpillar (CAT)
Industry: Farm and Construction Equipment
Debt & Coverage Ratios
Debt/Assets
Debt/Equity
Current Assets/Current Liability
EBITDA/Interest
Debt/EBITDA
Cash Flow Ops/Total Debt
Firm
0.45
2.32
1.36
8.52
2.87
0.22
Ind Avg
0.39
1.79
37.06
2.96
0.54
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
As of May 2018, CAT had a debt/asset ratio of .45 percent, and a debt/equity ratio of 2.32
percent which is higher than the industry average of .39 (Guru Focus, 2018). This generally means
that the Company has been aggressive in financing its growth with debt which will result in volatile
earnings from interest expenses. However, CAT ranked lower than 94 percent of the 128
companies in the global industry (Guru Focus, 2018). CAT’s current assets/current liability ratio
is 1.36 which is lower than the industry average of 1.79 and a sign that when compared to peers,
they are better able to pay off short-term obligations.
CAT’s EBITDA/interest ratio is 8.52 and a sign of low financial strength, where the
industry average was 37.06 (Guru Focus, 2018). The Company ranks lower than 81 percent of the
132 companies in the global industry (Guru Focus, 2018). CAT’s debt/EBITDA ratio is 2.87
where the industry average is 2.96. CAT is ranked lower than 64 percent of the 122 companies in
the global industry (CSI Markets, 2018). CAT’s cash flow ops/total debt ratio is .22 percent and
a sign that it could not pay off debt using cash in hand, where the industry average is .54 percent
(Guru Focus, 2018). The Company ranked lower than 78 percent of the 154 companies in the
global industry (CSI Markets, 2018).
Consolidated Edison (ED)
Industry: Utilities - Regulated Electric
Debt & Coverage Ratios
Debt/Assets
Debt/Equity
Current Assets/Current Liability
EBITDA/Interest
Debt/EBITDA
Cash Flow Ops/Total Debt
Firm
0.36
1.11
0.67
3.83
3.99
0.04
Ind Avg
0.96
1.07
5.16
3.63
0.25
As of May 2018, ED had a debt/assets ratio of .36 percent. ED had a debt/equity ratio of
1.11 percent where the industry average is.96 (Guru Focus, 2018). The Company’s high
debt/equity ratio is an indicator that it has been more aggressive than its peers in financing growth
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
with debt. However, ED ranked lower than 55 percent of the 568 companies in the global industry
(Guru Focus, 2018). ED’s current assets/current liability ratio is .67 percent which is lower than
the industry average of 1.07 (Guru Focus, 2018). The Company is ranked lower than 77 percent
of the 637 company in the global industry (Guru Focus, 2018). ED’s EBITDA/Interest ratio is 3.83
which is lower than the industry average of 5.16 and a sign that financial strength is lower when
compared to its peers.
Currently, ED is ranked lower than 64 percent of the 611 peer companies in the global
industry (Guru Focus, 2018). ED had a debt/EBITDA ratio of 3.99 where the industry average was
3.63 (Guru Focus, 2018). The Company is ranked lower than 52 percent of the 568 Companies in
the global industry (Guru Focus, 2018). The cash flow ops/total debt ratio was .04 percent and
lower than the industry average of .25 percent and a sign that it may be less likely to pay off debt
using cash in hand. With this regard, ED’s cash flow ops/total debt is ranked lower than 81 percent
of the 621 companies in the global industry (CSI Markets, 2018).
Northern Trust (NTRS)
Industry: Asset Management
Debt & Coverage Ratios
Debt/Assets
Debt/Equity
EBITDA/Interest
Debt/EBITDA
Cash Flow Ops/Total Debt
Firm
Ind Avg
0.14
1.80
0.27
-122
2.81
0
3.03
2.20 9999.0
As of May 2018, NTRS had a debt/assets ratio of .14 percent. The Company’s debt/equity
ratio was 1.80 percent, higher than the industry average of .27 (Guru Focus, 2018). This indicates
that NTRS uses aggressive financing tactics in its growth as opposed to its industry peers. This
can result in volatile earnings as a result of a large amount of interest expense (Guru Focus, 2018).
During the past 13 years, the highest debt/equity ratio of NTRS was 4.49 where the lowest was .40
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
and the median was 1.33 (Guru Focus, 2018). The debt/equity ratio of NTRS ranked lower than
88 percent of the 554 companies in the global industry (CSI Markets, 2018).
NTRS
EBITDA/Interest ratio is currently operating at a loss and did not have earnings to cover the interest
expense (CSI Markets, 2018).
For the first quarter of 2018, NTRS’s interest expense was -122 million and its operating
income was 0 million (Guru Focus, 2018). The debt/EBITDA at the end of the first quarter 2018
was 0 million a sign that it is able to pay off its debt quickly. NTRS also ranked lower than 77
percent of the 533 companies in the global industry where the industry average is 3.03 versus 3.31
for NTRS (Guru Focus, 2018). The Company had a cash flow ops/total debt ratio of 2.20 as
opposed to the industry average of 9999.0 and ranked lower than 81 percent of the 1151 companies
in the global industry (CSI Markets, 2018).
Macy's (M)
Industry: Department Stores
Debt & Coverage Ratios
Debt/Assets
Debt/Equity
Current Assets/Current Liability
EBITDA/Interest
Debt/EBITDA
Cash Flow Ops/Total Debt
Firm
0.30
1.04
1.47
15.37
1.00
0.25
Ind Avg
0.48
1.59
28.48
2.40
1.02
Macy’s (M) had a debt/assets ratio of .30 percent and a debt/equity ratio of 1.04 which is
higher than the industry average of .48 (Guru Focus, 2018). The high debt/equity ratio generally
means that Macy’s has been aggressive in financing its growth with debt. Macy’s current
assets/current liability ratio is 1.47 which is lower than the industry average of 1.59 and indicates
good financial strength (Guru Focus, 2018). The Company’s EBITDA/Interest ratio was 15.37
percent and lower than the industry average of 28.48 percent which shows a weaker financ ia l
strength when compared to its peers (Guru Focus, 2018). Macy’s debt/EBITDA ratio is 1.00 where
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
the industry average is higher at 2.40 percent (Guru Focus, 2018). The low ratio indicates that
Macy’s can pay of its debt faster when compared to its peers. Macy’s cash flow ops/total debt ratio
is .25 percent where the industry average is 1.02 percent which shows the Company is unable to
pay off its debt using cash in hand (Guru Focus, 2018).
Bii. The Intrinsic Value Of Stock Assets
A stock is capable of holding intrinsic value outside of what the market price and is an
important factor to consider by value investors when selecting a company to invest in. One variety
of this model is the Gordon Growth Model which assumes the company in consideration is within
a steady state and growing in dividends (Alvarez, 2018). This valuation method takes the value of
the stock based on the difference in EPS and per-share book value to arrive at an intrinsic value to
see if the security is higher or lower than market price (Alvarez, 2018).
The following data estimates the intrinsic value of stock assets for AAPL, CAT, ED,
NTRS, and M:
Apple (AAPL) Stock
Intrinsic Value (May 17th, 2018):
Current Stock Market Price:
EPS Estimate
Risk Free Interest Rate %
187.98
3.81
1.92 Source: U.S. Treasury Bill Data, 2018
Intrinsic Value
ROI
198.44
2.0
Caterpillar (CAT) Stock
Intrinsic Value (May 17th, 2018):
Current Stock Market Price:
EPS Estimate
Risk Free Interest Rate %
154.47
5.91
1.92 Source: U.S. Treasury Bill Data, 2018
Intrinsic Value
ROI
307.81
3.8%
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Consolidated Edison (ED) Stock
Current Stock Market Price:
EPS Estimate
Risk Free Interest Rate %
Intrinsic Value
ROI
74.13
2.09
1.92 Source: U.S. Treasury Bill Data, 2018
108.85
2.8%
Northern Trust (NTRS) Stock
Current Stock Market Price:
EPS Estimate
Risk Free Interest Rate %
Intrinsic Value
ROI
Intrinsic Value (May 17th, 2018):
109.29
1.43
1.92 Source: U.S. Treasury Bill Data, 2018
74.48
1.3%
Macy's (M) Stock
Intrinsic Value (May 17th, 2018):
Current Stock Market Price:
EPS Estimate
Risk Free Interest Rate %
Intrinsic Value
ROI
Intrinsic Value (May 17th, 2018):
34.48
2.85
1.92 Source: U.S. Treasury Bill Data, 2018
148.44
8.3%
C. Industry Trends
Ci. Historic Industry Microeconomic Data:
Apple (AAPL): The Technology Hardware, Storage & Peripherals Industry in the
Information Technology Sector:
Apple operates within the technology, hardware, storage, and peripherals industry of the
information technology sector (Collelo, 2018). Historical industry data have shown that there is an
upward trend, and that Apple’s financial results have been strong hence providing investors with
a decent forecast for upcoming reporting periods. One of the most critical factors for Apple in
maintaining its growth is the Company’s ability to retain customers and prevent loss of business
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
from other competitors in the IT sector. Since the product life cycles in the consumer electronics
industry are relatively short, competitor products may have chances to lure iOS customers away
from Apple, which could make it difficult to forecast future performance (Collelo, 2018).
Alongside these lines, Apple must be able to continuously develop new products or services since
investors in the tech industry are more likely to flock to a Company that will provide greater returns
on investment (Collelo, 2018). However, in comparison, no other competitors such as Nokia,
Motorola, or BlackBerry have offered secondary devices that partner with their phones which
gives Apple a unique edge in addition to its brand name (Collelo, 2018).
Source: Fidelity, 2018
AAPL’s Historical Growth Rates:
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Growth Rates
Stockholders Equity
Growth %
Revenues
Growth %
Earnings Per Share (EPS)
Growth Rate
Dividends Per Share
Growth Rate
Sustainable Growth (SGR)
EPS
DPS
ROE
Payout Ratio
Retention Ratio
SGR
AAPL Historical Growth Rates
2013
2014
123,549
111,547
-9.71%
170,910
182,795
6.95%
5.72
6.49
13.46%
1.69
1.85
9.47%
5.72
1.69
30.6%
0.30
0.70
21.59%
6.49
1.85
33.6%
0.29
0.71
24.03%
2015
119,355
7.00%
233,715
27.86%
9.28
42.99%
2.03
9.73%
2016
128,249
7.45%
215,639
-7.73%
8.35
-10.02%
2.23
9.85%
2017
134,047
4.52%
229,234
6.30%
9.27
11.02%
2.46
10.31%
9.28
2.03
48.3%
0.22
0.78
37.70%
8.35
2.23
36.9%
0.27
0.73
27.05%
9.27
2.46
36.9%
0.27
0.73
27.09%
Caterpillar (CAT): Sector: Industrials, Industry: Machinery
Caterpillar’s historical performance has shown has shown a fluctuation of higher net
income and revenue earnings during the years 2013 to 2015, a net loss of income in 2016, followed
by improvement in 2017. Analysts have forecasted that activity in the industrials sector and
machinery industry is likely to strengthen, however, other analysts note concerns over trade wars
that are impacting sales. The farm and construction industry has been in growth mode recently due
to a number of factors such as U.S. tax reform, strong economic activity, and positive commodity
price trends (Schoonmaker, 2018). Caterpillar has become one of the largest to second-largest
manufacturers of just about every product it makes and controls 19 percent of the global new
construction equipment market and nearly twice as large of its direct competitor, Komatsu
(Schoonmaker, 2018). New equipment sales for the machinery industries have been tied to heavy
construction and the general construction sector, mostly within the North Americas (45%), and the
Asian-Pacific (20%). Over the past seven years, Caterpillar’s spending on R&D averaged around
2 billion per year which exceeded the spending of another competitor (Schoonmaker, 2018). The
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
spending on R&D has allowed the Company to continuously innovate and develop better quality
products with stronger brand against its competitors.
Source: Fidelity, 2018
CAT’s Historical Growth Rates:
Growth Rates
Stockholders Equity
Growth %
Revenues
Growth %
Earnings Per Share (EPS)
Growth Rate
Dividends Per Share
Growth Rate
Sustainable Growth (SGR)
EPS
DPS
ROE
Payout Ratio
Retention Ratio
SGR
CAT Historical Growth Rates
2013
2014
20,811
16,746
-19.53%
55,656
55,184
-0.85%
5.87
5.99
2.04%
1.72
2.60
51.16%
5.87
1.72
19.8%
0.29
0.71
13.97%
5.99
2.60
19.7%
0.43
0.57
11.14%
2015
2016
14,809
13,137
-11.57% -11.29%
47,011
38,537
-14.81% -18.03%
3.54
-0.11
-40.90% -103.11%
2.94
3.08
13.08%
4.76%
3.54
2.94
13.3%
0.83
0.17
2.26%
2017
13,697
4.26%
45,462
17.97%
1.27
-1254.55%
3.10
0.65%
-0.11
3.08
-0.5%
-28.00
29.00
-13.92%
1.27
3.10
5.6%
2.44
-1.44
-8.10%
Consolidated Edison (ED): Utilities Sector and Multi-Utilities Industry
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Con-Ed operates within the utilities sector and multi- utilities industry in New York State
(NYS). The company focuses on electric and natural gas distribution, and has produced some of
the most stable earnings in the utilities sector. The regulatory framework in NYS, is a significa nt
factor which impacts earnings from weather and sales volume, resulting in lower earnings and cash
flow when compared to its peers (Fishman, 2018). NYS is the home to most of Con-Ed’s utility
earnings and returns are generally below the industry averages. Hence, there is less than average
confidence that the Company would be able to consistently earn profits above its cost of capital
during the next 15 years (Fishman, 2018). Con-Ed’s customers in New York City pay some of
the highest rates for electricity in the U.S. In addition, the city’s infrastructure is very old which
is more expensive to maintain placing the Company at risk from storm related damage (Fisherma n,
2018).
Source: Fidelity, 2018
ED’s Historical Growth Rates:
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Growth Rates
Stockholders Equity
Growth %
Revenues
Growth %
Earnings Per Share (EPS)
Growth Rate
Dividends Per Share
Growth Rate
Sustainable Growth (SGR)
EPS
DPS
ROE
Payout Ratio
Retention Ratio
SGR
ED Historical Growth Rates
2013
2014
20,811
16,746
-19.53%
12,354
12,919
4.57%
3.62
3.73
3.04%
1.72
2.60
51.16%
3.62
2.46
8.8%
0.68
0.32
2.82%
3.73
2.52
8.8%
0.68
0.32
2.85%
2015
14,809
-11.57%
12,554
-2.83%
4.07
9.12%
2.94
13.08%
2016
13,137
-11.29%
12,075
-3.82%
4.15
1.97%
3.08
4.76%
2017
13,697
4.26%
12,033
-0.35%
4.97
19.76%
3.10
0.65%
4.07
2.60
9.3%
0.64
0.36
3.36%
4.15
2.68
9.1%
0.65
0.35
3.22%
4.97
2.76
10.3%
0.56
0.44
4.56%
Northern Trust (NTRS): Financials Sector and Capital Markets Industry
Northern Trust operates within the financials sector and capital markets industry, and due
to the current less stringent regulatory environment, the Company is likely to reduce excess capital
and increase its leverage by at least 5 percent (Compton, 2018). In addition, returns on equity
(ROE) are likely to increase by over 20 percent during the next five years (Compton, 2018).
Northern Trust consists of two business segments of a private bank that serves wealthy investors
in the U.S., and a custodian bank that serves institutional customers around the world (Compton,
2018).
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Northern Trust is also one of the most conservative and stable financial companies which
has often had more room for growth since it started out small (Compton, 2018). The Company’s
private banking operations serves more than 20 percent of the Forbes 400 richest families with
client relationships that have spanned over generations (Compton, 2018).
This allows the
Company to maintain a strong position with high net worth clientele and investors who tend to
have less complex needs which has protected the bank from increased competition (Compton,
2018). In addition, Northern Trust is expected to grow over the next couple of years due to rising
interest rates which should improve ROE.
Northern Trust (NTRS) Growth Rates
Growth Rates
2013
2014
2015
Stockholders Equity
7,102
8,449
8,706
Growth %
18.97%
3.04%
Revenues
3,923
4,331
4,703
Growth %
10.40%
8.59%
Earnings Per Share (EPS)
3.07
3.34
4.03
Growth Rate
8.79%
20.66%
Dividends Per Share
1.23
1.30
1.41
Growth Rate
5.69%
8.46%
Sustainable Growth (SGR)
EPS
3.07
3.34
4.03
DPS
1.23
1.30
1.41
ROE
10.3%
9.5%
10.9%
Payout Ratio
0.40
0.39
0.35
Retention Ratio
0.60
0.61
0.65
SGR
6.17%
5.80%
7.09%
2016
9,770
12.22%
4,962
5.51%
4.35
7.94%
1.48
4.96%
2017
10,216
4.56%
5,375
8.32%
4.59
5.52%
1.60
8.11%
4.35
1.48
10.3%
0.34
0.66
6.80%
4.59
1.60
11.2%
0.35
0.65
7.30%
Macy’s (M): Consumer Discretionary Sector and Department Stores Industry:
Macy’s (M) operates within the consumer discretionary sector and the department stores
industry which is now one of the largest department stores within the U.S. However, the industry
has been extremely competitive and likely to see a reduction in profits during upcoming reporting
periods. Over the next five years, analysts have projected that Macy’s sales will decline by 1
percent on average, and operating margins will fall to 5 percent by 2021 against their 8 percent
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
three-year historical average (Brick, 2018). Investors had been rewarded total shareholder returns
of 412 percent from 2009 to 2015, but the Company has since stumbled (Brick, 2018). In addition,
spending has shifted from apparel to other categories and department stores are likely to be forced
to compete on price as a result of increased online competition (Brick, 2018). Macy’s is
continuously losing market share to other sector categories such as healthier foods or new
technologies and department store sales have fallen by 3 percent annually over the past five years.
(Brick, 2018).
Source: Fidelity, 2018
Growth Rates
Stockholders Equity
Growth %
Revenues
Growth %
Earnings Per Share (EPS)
Growth Rate
Dividends Per Share
Growth Rate
Sustainable Growth (SGR)
EPS
DPS
ROE
Payout Ratio
Retention Ratio
SGR
Macy's (M)
2013
6,051
27,686
3.29
0.95
3.29
0.95
22.3%
0.29
0.71
15.85%
2014
6,249
3.27%
27,931
0.88%
3.93
19.45%
1.19
25.26%
2015
5,378
-13.94%
28,105
0.62%
4.3
9.41%
1.39
16.81%
2016
4,250
-20.97%
27,079
-3.65%
3.26
-24.19%
1.49
7.19%
2017
4,323
1.72%
25,778
-4.80%
2.01
-38.34%
1.51
1.34%
3.93
1.19
24.2%
0.30
0.70
16.84%
4.3
1.39
26.3%
0.32
0.68
17.76%
3.26
1.49
22.3%
0.46
0.54
12.09%
2.01
1.51
14.4%
0.75
0.25
3.59%
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Cii. Analysis Of Quantitative Data Across Sectors And Industries
The following data shows Market-Cap & Industry Performance Breakdown for M, NTRS,
ED, CAT, & AAPL:
Market Cap and Industries In Comparison for
AAPL, CAT, ED, NTRS, M
S&P 500
13.18
25.39
Multi-Line Retail
34.42
148.34
Capital Markets 1.29
27.37
Multi-Ultilities-7.21
374.91
Machinery
784.54
Technology Hardware, Storage &…1.14
-20%
0%
17.75
21.92
20%
Market Cap
40%
60%
80%
100%
1-Year % Change
Source: Fidelity, 2018
The following data shows market-cap and sector performance breakdowns for AAPL,
CAT, ED, NTRS, & M:
Market Cap & Sector Performance for M, NTRS,
ED, CAT, & AAPL
25.39
5.81
S&P 500
13.18
Consumer Discretionary
18.43
7.7
Financials
18.05
Utilities
-4.92
1.23
4.28
9.55
-10
0
Industrials
11.14
Information Technology
27.45
10
20
Market Cap
30
40
50
1 Year % Change
Source: Fidelity, 2018
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Quantitative industry data have shown that there are recent growth trends within the
information technology and consumer discretionary/multi- line retail industries and sectors
(Fidelity, 2018). Growth in these industries are likely to continue as a result of U.S. tax cuts and
fiscal stimulus acts which have helped with inflation in the first quarter of 2018 and pushed the
stock market high (Fidelity, 2018). On the other hand, the financials sector and capital markets
industries have weakened when compared to other industries and sectors (Fidelity, 2018). The
valuation of the technology, industrials, and consumer discretionary sectors have been elevated
and relative to their historical averages due to strong performance in recent quarters (Fidelity,
2018). The technology, consumer discretionary, and financials sectors have continued with steady
growth in the first quarter of 2018, are likely to be leaders in the market, where consumer
discretionary is now a part of the top three sectors and on a steady long-term uptrend (Fidelity,
2018). However, the utilities sector is continuing to lag behind with no reported change in trends
(Fidelity, 2018). The defensive sectors such as utilities, real estate, and telecom, have also lagged
in the market, with no sign of a change in trend (Fidelity, 2018).
D. Stakeholders
Di. Five Key Stakeholders And Their Needs In Relation To The Company’s Portfolio.
The five key stakeholders in relation to the Company’s portfolio includes employees,
customers, communities, investors, and regulators (HBR, 2007). Employee needs are based
around the desire to work for a company that is financially stable and able to make good
investments that lead to meeting their personal needs, job growth, improved work environme nt,
and improved visions that help employees become more competent and committed to working for
the company (HBR, 2007). Customers tend seek out companies they can trust to do business with
that have innovative products and services which is where investment strategies are necessary to
be able to sustain growth. Communities expect companies to make investments that not only build
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
organizations, but are also socially responsible. This is where it is necessary to select stocks that
have a good reputation in society and communities as to how they treat the environment and serve
the larger community. Investors expect the company to keep their promises in developing growth
strategies that align core competencies to the strategy and are committed to delivering adequate
returns on investment. When this occurs, investors gain high levels of confidence in the company
and are likely to continue to invest, which leads to higher market value. Regulators expect that
company leadership govern themselves in accordance to the securities laws and with high ethical
principles when engaging in investment activities.
Dii. Common Stockholders’ Primary Objective And Required Return On Equity.
The common stockholders’ primary objective is to invest in stocks that are profitable which
may involve measuring return on equity (ROE), or how much profit a company may generate with
the money invested (Investopedia, 2018). ROE estimates how effective the company is turning
cash into greater gains and growth for both the company and investors. The higher the ROE, the
more efficient the company is making use of the stockholders’ funds.
Some factors that
stockholders consider are the weighted average number of shares issued throughout the year, the
average ROE over the past 5 to 10 years of historical growth, and whether or not a high growth
company is actually producing a higher ROE (Investopedia, 2018). The price-to-earnings (P/E)
ratio is another factor that stockholders look at which takes the stock price and divides it by net
income per share. However, one of the biggest weaknesses of ROE is its failure to recognize a
company’s debt (Early, 2018). However, higher debt would potentially increase a company’s
resource based necessary in generating additional profits.
Since debt financing is more cost
effective than equity financing, companies can enhance their returns by taking on debt in a
reasonable amount (Early, 2018).
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
II. Portfolio:
A. Assets
Ai. Asset Classes, Considering The Portfolio’s Risk/Return Trade -Offs And Objectives.
The specific asset classes of the portfolio will consider a possible 80 percent allocation of
funds towards stocks and 20 percent toward bonds with the goal of optimizing growth. A growth
orientated corporation’s primary objective is to optimize the long-term potential for growth, and
would be willing to tolerate large short term price fluctuations, that has a long term investme nt
time horizon, with current income not being the primary goal (Investopedia, 2018).
Proposed Stock Portfolio for XYZ Company:
When analyzing the beta of the five stocks, a beta of 1 specifies that the stock’s price moves
with the market, where a beta of less than 1 indicates that the security is less volatile than the
market (Investopedia, 2018). A beta greater than 1 means that the stock’s price is more volatile
than the market. Therefore, a low beta is expected to underperform the benchmark in up markets
and outperform during down markets (Investopedia, 2018). Where most utilities and financ ia l
industry stocks such as Con-Ed have a beta less than 1, and NASDAQ based stocks such as Apple,
have a beta greater than 1 which offers a possible higher return but also more risk (Investopedia,
2018). The CAPM describes the relationship between systematic risk and expected return for the
stocks, as well as generating expected portfolio returns given the risk of those assets and costs of
capital. In modern portfolio theory, the risk-free rate of return shows the rate of return of an
investment with zero risk and is the minimum return an investor expects for any investme nt
(Investopedia, 2018). The interest rate is generally taken on a three-month U.S. Treasury bill for
U.S. based investors. The portfolio variance measures how the aggregate actual returns of the set
of stocks fluctuate over time using the standard deviations of each security as well as the
correlations of each security in the portfolio. The variance can be reduced by selecting asset classes
30
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
with low or negative correlations (Investopedia, 2018). The Sharpe ratio shows the change in the
portfolio’s overall risk-return when a new asset allocation is added to it.
A high Sharpe ratio
signifies that it actually improves the risk-return of a combined portfolio and adds a diversifica tio n
(Investopedia, 2018). If a new investment lowers the Sharpe ratio, then theoretically it should not
be added to the portfolio.
XYZ, Inc. Proposed Optimal Stock Portfolio
1.60
4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%
1.40
1.20
1.00
0.80
0.60
0.40
0.20
0.00
Macy's
AAPL
CAT
ED
NTRS
Macys
Apple
Caterpillar
ED
Northern Trust
Beta
CAPM
Weight
Portfolio Contribution
XYZ, Inc. Optimal Portfolio
Weights, Returns, & Rates
Leverage
Sharpe Ratio
Total Portfolio Return
Risk Free Rate
Market Return
100%
1.52
17.15%
1.92%
10%
Standard Deviation
Portfolio Variance
SUM
Northern Trust
ED
Caterpillar
Apple
Macys
0.10488
0.00880
100%
18%
12%
24%
36%
10%
0%
20%
40%
60%
80%
100%
120%
140%
160%
31
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Proposed Bond Portfolio for XYZ, Inc.:
The proposed bond portfolio was constructed using callable securities with a focus on
capital gains as well as income, as opposed to a buy and hold strategy focused on income and
principal. Callable securities assume that yields will remain relatively stable and must also have
views on the range of rates over the investment period as well as the market’s perception of future
rate uncertainty at the horizon date (Conley, 2018). Interest rate risks when investing in bonds are
also important since bond prices go in the opposite direction when related to interest rates. Hence,
when interest rates go up, the bond prices will go down and vice versa, thus adding an additiona l
diversification benefits to the portfolio (Gallant, 2018). Furthermore, diversifying with both longterm and short-term bonds minimize additional risks since long term bonds are more subject to
interest rate risks when compared to short term bonds (Gallant, 2018).
Bond Portfolio
Ma cy’s (M)
Northern Trust (NTRS)
Consolidated Edison (ED)
Caterpillar (CAT)
Apple, Inc. (AAPL)
816.63
54.5
1051.3
24
6.36%
904.54
2
3.41%
954.08
1039.5
134.8
25
4.17%
6
3.48%
1084.97
1046.5
101.74
28
4.25%
Consolidated
Edison (ED)
954.08
Northern Trust
(NTRS)
1001.47
685.87
134.8
904.54
54.5
1034
1039.5
1034.5
1051.3
Caterpillar (CAT)
Int Value
1084.97
992.26
PV Cash Flow
101.74
Cash Flow
1046.5
YTM
992.26
1034
685.87
Apple, Inc. (AAPL)
Maturity
1001.47
1034.5
Ma cy’s (M)
816.63
28
6
25
2
24
4.25%
3.48%
4.17%
3.41%
6.36%
Int Value
PV Cash Flow
Cash Flow
Maturity
YTM
32
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Aii. Asset Allocation Weightings Across Asset Classes, Sectors, And Industries:
Portfolio Weights
Macys
Apple
Caterpillar
ED
Northern Trust
Stock
Macy's
AAPL
CAT
ED
NTRS
AAPL
0.05130
0.01738
0.00002
0.00006
0.00006
AAPL
CAT
ED
NTRS
M
Beta
0.50
1.11
1.49
0.01
0.01
CAPM
5.96%
10.89%
13.96%
2.00%
2.00%
Weight
10%
36%
24%
12%
18%
Variance-Co-Variance Matrix
CAT
ED
NTRS
0.01738
0.00174
0.00605
0.05663
-0.00635
0.01206
-0.00635
0.03130
-0.01314
0.01206
-0.01314
0.03708
-0.02015
-0.00661
0.00543
Portfolio Contribution
0.60%
3.92%
3.35%
0.24%
0.36%
M
0.00566
-0.02015
-0.00661
0.00543
0.11496
.
Sector Weights in the S&P 500
30.00%
24.90%
25.00%
Weights
20.00%
15.00%
12.70%
14.70%
10.20%
10.00%
2.90%
5.00%
0.00%
Consumer Financials
Discretionary
Industrials
Information
Technology
Utilities
Industry
B. Securities
Bi. Historical Revenue And Earnings Growth In Comparison To Peers In The Industry.
The following analysis consists of historical revenue and earnings growth in
comparison to peers in the industry based on results for APPL, CAT, ED, NTRS, &
M.
33
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Fiscal year ends in September.
USD in millions except per share data.
Net Income
Revenue
Total assets
Total stockholders' equity
Net Profit Margin
x Total Asset Turnover
Return on Assets (ROA)
Equity Multiplier (EM)
Return on Equity (ROE)
AAPL Market and Industry Performance
2013
37,037
170,910
207,000
123,549
2014
39,510
182,795
231,839
111,547
2015
53,394
233,715
290,479
119,355
2016
45,687
215,639
321,686
128,249
2017
48,351
229,234
375,319
134,047
21.7%
0.83
17.89%
1.7
30.0%
21.6%
0.79
17.04%
2.1
35.4%
22.8%
0.80
18.38%
2.4
44.7%
21.2%
0.67
14.20%
2.5
35.6%
21.1%
0.61
12.88%
2.8
36.1%
AAPL Market and Industry Performance Comparison As of May 2018
AAPL
Industry Average
Market Cap (B)
926.9
16.35
Total Annual Return
22.56%
21.09%
Beta (1 Year Annualized)
1.24
1.28
EPS TTM
$10.37
$8.75
EPS Growth TTM
21.17%
17.65%
P/E TTM
18.2
17.57
Dividend Yield
1.55%
1.61%
Revenue (TTM) (B)
247.42
206.24
Revenue Growth Rate (TTM)
12.23%
11.48%
Shares Outstanding (Trillion )
4.92
4.15
AAPL Market and Industry Comparison As of May
2018
Shares Outstanding (Trillion )
Revenue Growth Rate (TTM)
Revenue (TTM) (B)
Dividend Yield
P/E TTM
EPS Growth TTM
EPS TTM
Beta (1 Year Annualized)
Total Annual Return
Market Cap (B)
4.92
12.23%
247.42
1.55%
18.2
21.17%
$10.37
1.24
22.56%
4.15
11.48%
206.24
1.61%
17.57
17.65%
$8.75
1.28
21.09%
926.9
0%
16.35
10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
AAPL
Industry Average
34
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Fiscal year ends in January.
USD in millions except per share data.
Net Income
Revenue
Total assets
Total stockholders' equity
Macy's (M) Market and Industry Performance
2013
1,335
27,686
20,991
6,051
2014
1,486
27,931
21,634
6,249
2015
1,526
28,105
21,461
5,378
2016
1,072
27,079
20,576
4,250
4.8%
1.32
6.36%
3.5
22.1%
5.3%
1.29
6.87%
3.5
23.8%
5.4%
1.31
7.11%
4.0
28.4%
4.0%
1.32
5.21%
4.8
25.2%
Net Profit Margin
x Total Asset Turnover
Return on Assets (ROA)
Equity Multiplier (EM)
Return on Equity (ROE)
2017
619
25,778
19,851
4,323
2.4%
1.30
3.12%
4.6
14.3%
Macy's and Industry Performance Comparison As of May 2018
M
Industry Average
Market Cap (B)
$10.44
$2.12
Total Annual Return
46.10%
31.77%
Beta (1 Year Annualized)
0.75
0.84
EPS TTM
$5.26
$5.57
EPS Growth TTM
179.79%
47.39%
P/E TTM
6.49
14.52
Dividend Yield
4.42%
2.47%
Revenue (TTM) (B)
$25.20
$31.38
Revenue Growth Rate (TTM)
-1.26%
6.07%
Shares Outstanding (Million ) 305.95
282.15
Macy's and Industry Performance Comparison As
of May 2018
305.95
Revenue Growth Rate -1.26%
(TTM)
$25.20
4.42%
6.49
179.79%
$5.26
0.75
46.10%
$10.44
Dividend Yield
EPS Growth TTM
Beta (1 Year Annualized)
Market Cap (B)
-20%
282.15
6.07%
0%
20%
M
40%
$31.38
2.47%
14.52
47.39%
$5.57
0.84
31.77%
$2.12
60%
80%
100%
Industry Average
35
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Fiscal year ends in December.
USD in millions except per share data.
Net Income
Revenues
Total assets
Total stockholders' equity
Net Profit Margin
x Total Asset Turnover
Return on Assets (ROA)
Equity Multiplier (EM)
Return on Equity (ROE)
CAT Market and Industry Performance
2013
3,789
55,656
84,896
20,811
2014
3,695
55,184
84,681
16,746
2015
2,102
47,011
78,497
14,809
2016
612
38,537
74,704
13,137
6.8%
0.66
4.46%
4.1
18.2%
6.7%
0.65
4.36%
5.1
22.1%
4.5%
0.60
2.68%
5.3
14.2%
1.6%
0.52
0.82%
5.7
4.7%
2017
754
45,462
76,962
13,697
1.7%
0.59
0.98%
5.6
5.5%
CAT Market and Industry Performance Comparison As of May 2018
CAT
Industry Average
Market Cap (B)
$93.19
$11.21
Total Annual Return
48.40%
18.64%
Beta (1 Year Annualized)
1.3
1.22
EPS TTM
$3.68
$3.57
EPS Growth TTM
0.00%
42.34%
P/E TTM
42.35
22.99
Dividend Yield
2.00%
2.02%
Revenue (TTM) (B)
$48.50
$17.46
Revenue Growth Rate (TTM)
24.68%
18.12%
Shares Outstanding (Millions)
598
372
CAT Market and Industry Performance Comparison As of May
2018
Shares Outstanding (Millions)
598
372
Revenue Growth Rate (TTM)
24.68%
18.12%
Revenue (TTM) (B)
$48.50
Dividend Yield
$17.46
2.00%
P/E TTM
2.02%
42.35
22.99
EPS Growth TTM0.00%
42.34%
EPS TTM
$3.68
Beta (1 Year Annualized)
$3.57
1.3
Total Annual Return
1.22
48.40%
Market Cap (B)
18.64%
$93.19
0%
10%
20%
CAT
30%
40%
50%
$11.21
60%
70%
80%
90% 100%
Industry Average
36
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Fiscal year ends in December.
Consolidated Edison (ED) Market and Industry Performance
USD in millions except per share data.
2013
2014
2015
2016
2017
Net Income
1,062
1,092
1,193
1,245
1,525
Revenue
12,354
12,919
12,554
12,075
12,033
Total assets
40,647
44,308
45,642
48,255
48,111
Total stockholders' equity
20,811
16,746
14,809
13,137
13,697
Net Profit Margin
x Total Asset Turnover
Return on Assets (ROA)
Equity Multiplier (EM)
Return on Equity (ROE)
8.6%
0.30
2.61%
2.0
5.1%
8.5%
0.29
2.46%
2.6
6.5%
9.5%
0.28
2.61%
3.1
8.1%
10.3%
0.25
2.58%
3.7
9.5%
12.7%
0.25
3.17%
3.5
11.1%
Consolidated Edison (ED) and Industry Performance Comparison As of May 2018
ED
Industry Average
Market Cap (B)
$23.59
$5.36
Total Annual Return
-7.47%
-2.25%
Beta (1 Year Annualized)
0.04
0.48
EPS TTM
$5.04
$3.09
EPS Growth TTM
16.40%
37.59%
P/E TTM
15.06
15.11
Dividend Yield
3.77%
4.93%
Revenue (TTM) (B)
$12.17
$22.51
Revenue Growth Rate (TTM)
0.18%
4.97%
Shares Outstanding (Million )
310.7
727.9
ED vs. Industry Comparison As of May 2018
-2.25%
-100%
-80%
Shares Outstanding (Million )
310.7
727.9
Revenue Growth Rate (TTM) 0.18%
4.97%
Revenue (TTM) (B)
$12.17
$22.51
Dividend Yield
3.77%
4.93%
P/E TTM
15.06
15.11
EPS Growth TTM
16.40%
37.59%
EPS TTM
$5.04
$3.09
Beta (1 Year Annualized) 0.04
0.48
Total
Annual Return
-7.47%
Market Cap (B)
$23.59
$5.36
-60%
-40%
-20%
ED
0%
20%
40%
60%
80%
100%
Industry Average
37
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Fiscal year ends in December.
USD in millions except per share data.
Northern Trust (NTRS) Market and Industry Performance
2013
Net Income
Revenue
Total assets
Total stockholders' equity
2014
2015
728
3,923
102,659
7,102
802
4,331
109,946
8,449
950
4,703
116,750
8,706
2016
1,009
4,962
123,927
9,770
2017
1,149
5,375
138,590
10,216
18.6%
0.04
0.71%
14.5
10.3%
18.5%
0.04
0.73%
13.0
9.5%
20.2%
0.04
0.81%
13.4
10.9%
20.3%
0.04
0.81%
12.7
10.3%
21.4%
0.04
0.83%
13.6
11.2%
Net Profit Margin
x Total Asset Turnover
Return on Assets (ROA)
Equity Multiplier (EM)
Return on Equity (ROE)
NTRS and Industry Performance Comparison As of May 2018
NTRS
Industry Average
Market Cap (B)
$23.99
$18.43
Total Annual Return
20.76%
2760736.00%
Beta (1 Year Annualized)
0.96
1.27
EPS TTM
$5.41
$5.95
EPS Growth TTM
23.52%
29.60%
P/E TTM
19.71
20.43
Dividend Yield
1.58%
2.20%
Revenue (TTM) (B)
$5.97
$16.72
Revenue Growth Rate (TTM)
13.74%
16.25%
Shares Outstanding (Million )
224.99
838.98
NTRS and Industry Performance Comparison As of May 2018
Shares Outstanding (Million )
224.99
Revenue Growth Rate (TTM)
838.98
13.74%
Revenue (TTM) (B)
16.25%
$5.97
Dividend Yield
$16.72
1.58%
P/E TTM
2.20%
19.71
EPS Growth TTM
20.43
23.52%
EPS TTM
29.60%
$5.41
Beta (1 Year Annualized)
$5.95
0.96
1.27
Total Annual Return20.76%
2760736.00%
Market Cap (B)
$23.99
0%
10%
20%
NTRS
30%
$18.43
40%
50%
60%
70%
80%
90%
100%
Industry Average
38
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Bii. The Intrinsic Value Of Assets:
The intrinsic value of the assets were calculated using the present value of the company’s
future free cash flows into a discounted cash flow (DCF) model projected over a ten year period.
The annual discount rate of 10 percent was used with the assumption that there could be another
economic recession in the next ten years. The discontinued perpetuity value was calculated using
the rate of 3 percent assuming that growth will slow down in the future:
AAPL Intrinsic Value By Year 2027+ Assuming 3% Future Growth 2018+
Discounted Perpetuity CF
35,379.46
*In billions
Shares Outstanding
5,000
*In billions
Intrinsic Value
$147.08
per share
CAT Intrinsic Value By Year 2027+ Assuming 3% Future Growth 2018+
Discounted Perpetuity CF
55,169.27
*In billions
Shares Outstanding
603
*In millions
Intrinsic Value
$91.49
per share
ED Intrinsic Value By Year 2027+ Assuming 3% Future Growth 2018+
Discounted Perpetuity CF
3,349.19
*In millions
Shares Outstanding
310
*In millions
Intrinsic Value
$10.80
per share
NTRS Intrinsic Value By Year 2027+ Assuming 3% Future Growth 2018+
Discounted Perpetuity CF
48,104.00
*In billions
Shares Outstanding
229
*In millions
Intrinsic Value
$210.06
per share
M Intrinsic Value By Year 2027+ Assuming 3% Future Growth 2018+
Discounted Perpetuity CF 28,052.11
*In millions
Shares Outstanding
306.8
*In millions
Intrinsic Value
$91.43
Per share
Apple’s current stock price is $187.50, where the highest price to intrinsic value projected
FCF is ranked higher than 65 percent of the 1,289 companies in the global industry (Guru Focus,
2018). Caterpillar’s current stock price is $155.46 and the highest price to intrinsic value projected
FCF is ranked lower than 63 percent of the 93 companies in the global industry (Guru Focus,
39
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
2018). Consolidated Edison’s current stock price is $75.54 where the highest price to intrins ic
value projected FCF ranked lower than 54 percent of the 292 companies in the global industry
(Guru Focus, 2018). The stock price of Northern Trust is currently $105.76, whereas the highest
price to intrinsic value projected FCF is ranked lower than 56 percent of the 306 companies in the
global industry (Guru Focus, 2018). The stock price of Macy’s is currently $35.56, and the price
to intrinsic value projected FCF is ranked higher than 87 percent of the 487 companies in the glob al
industry (Guru Focus, 2018).
C. Rates of Return
Ci. Historical Risk And Rates Of Return Against The S&P 500
Historical rates of return were calculated and benchmarked against the S&P 500 using
a linear regression analysis of monthly data from July 1, 2017 to May 1, 2018. The R-squared
in the equation and the coefficient R of the five stocks shows the correlation between the stocks
(AAPL, CAT, ED, NTRS, M) and the S&P 500. A high R-squared is indicative that the stock’s
performance is in movement with the S&P 500. The higher the R-squared, the better the
performance of the security in the S&P. In the following analysis, y represents monthly returns
for the respective Company, and x represents the S&P 500. What the equation explains is that
for every increase of 1 percentage point of the S&P (x), there is a point increase in the Company
return (y), which is the slope of the line. If the S&P were zero in a month, or no moveme nt
then the stock would decline by the percentage point in y. The R-squared is the percentage
variation in y attributed to the S&P.
The higher the R-squared, the better the performance of the security in the S&P. In the
following analysis, y represents monthly returns for the respective Company, and x represents
the S&P 500. What the equation explains is that for every increase of 1 percentage point of the
40
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
S&P (x), there is a point increase in the company return (y), which is the slope of the line. If
the S&P were zero in a month, or no movement then the stock would decline by the percentage
point in y. The R-squared is the percentage variation in y attributed to the S&P. A high Rsquared between 85 and 100 percent is a sign that the stock’s performance moves in line with
the index, where a fund with a low R-squared at 70 or lower, indicates that it does not generally
follow movements in the index (Investopedia, 2018). A higher R-squared will also provide a
more useful beta figure.
y = 1.0092x - 0.0099
R² = 0.1992
-0.06
-0.04
S&P-APPL
07/01/2017-05/1/2018 Monthly Returns
0.08
0.06
0.04
0.02
0
-0.02 -0.02 0
-0.04
-0.06
-0.08
-0.1
-0.12
-0.14
0.02
0.04
0.06
41
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
y = -0.3945x - 0.0067
R² = 0.0257
S&P-CE
07/01/2017-05/01/2018 Monthly Returns
0.1
0.05
0
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
-0.05
-0.1
-0.15
y = -0.0745x - 0.0128
R² = 0.0025
S&P-NTRS
07/01/2017- 05/01/2018 Monthly Returns
1.2
1
0.8
0.6
0.4
0.2
0
-0.06
-0.04
-0.02
0
0.02
0.04
0.06
-0.2
S&P-M
07/01/2017 - 05/01/2018 Monthly Returns
y = -0.9381x - 0.0049
R² = 0.0221
0.5
0.4
0.3
0.2
0.1
0
-0.06
-0.04
-0.02
-0.1
0
0.02
0.04
0.06
-0.2
-0.3
42
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Bii. Required Rates Of Return
The required rates of return for AAPL, CAT, ED, NTRS, and M were calculated taking the
risk free rate plus the beta of each individual stock multiplied by the expected market return minus
the risk free rate of return. Therefore, in order to take on the investment, the individual stock must
meet or exceed the required return in order to justify the risk of owning it. However, regardless
of the risk-return objectives, to assemble an efficient portfolio, risks and returns can be minimized
through diversification with multiple stocks and bonds from different industries and sectors.
Required Rates of Return
For AAPL, CAT, ED, NTRS, & M
Stock
Beta Required Return
Macys
0.50
5.96
Apple
1.11
10.89
Caterpillar
1.49
13.96
ED
0.01
2.00
Northern Trust
0.01
2.00
Risk-Free Rate
1.92
Expected Market Return
10
D. Risk/Return Trade-Off On The Investments.
The risk-return tradeoff is the concept in which a potential investment return will rise with
an increase in risk, while low levels of risk are associated with lower returns. Invested money can
lead to higher profits only if the investor is willing to accept the potential losses should they occur
(Investopedia, 2018). At the portfolio level, the risk-return tradeoff includes an assessment on the
diversity of holdings and whether or not the mix presents too much risk or a lower than expected
potential for returns. Under Modern Portfolio Theory (MPT), investors may design an optimal
portfolio in order to maximize returns while taking on a quantifiable amount of risk, and the risk
can be reduced through diversification using a quantifiable method (McClure, 2017). Therefore ,
investment in more than one stock would reduce the riskiness of the portfolio in the event that the
43
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
return is lower than expected or deviates from the average return. For a well-diversified portfolio,
the risk or average deviation from the mean of each stock would contribute little risk, and instead,
the covariance between the individual stocks’ risk would determine the amount of overall portfolio
risk (McClure, 2017).
The following portfolio analysis shows a comparison between the optimal risky portfolio
and an equally weighted portfolio of assets for AAPL, CAT, ED, NTRS, and M taking monthly
data from December 1, 2013 to May 1, 2018.
Equally Weighted Portfolio
AAPL
0.20
CAT
0.20
ED
0.20
NTRS
0.20
M
0.20
SUM
1.00
Expected Return
Std Deviation
Sharpe Ratio
14.62%
10.87%
1.17
Optimal Risky Portfolio
AAPL
0.22
CAT
0.11
ED
0.35
NTRS
0.32
M
0.00
SUM
1.00
Expected Return
Std Deviation
Sharpe Ratio
17.15%
10.04%
1.52
AAPL
CAT
ED
NTRS
M
Returns
24.44%
19.28%
11.88%
16.75%
-0.23%
Risk Free Rate
Aversion Rate
1.92%
10
The higher the variance, the less attractive the stock is for investing. As you can see from
the analysis, Macy’s has an extremely high variance of 11.72% when compared to the other stocks,
as well as the lowest return thus not an attractive investment. However, Macy’s could be included
as a part of the portfolio in consideration of whether it could add value by combining it with the
other four stocks. The Companies with the highest average annual returns are Apple, Caterpillar,
and Northern Trust. Assuming we have an equally weighted investment allocation of 20 percent
for each stock, the expected return of the entire portfolio would be 14.62 percent where the
standard deviation would be 10.87 percent, and the Sharpe Ratio would be 1.17. However, for an
optimal risky portfolio, the Company is likely to benefit from greater returns (Van Delsem, 2016).
An optimal risky portfolio would result in weighted allocations for AAPL, CAT, ED, NTRS, and
M of .22, .11, .35, .32, and 0 respectively, thus resulted in a higher expected return of 17.15 percent,
44
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
a standard deviation of 10.04 percent, and a Sharpe Ratio of 1.52. This would give a much higher
Sharpe Ratio which would improve the risk-return trade off fairly dramatically by changing the
weights of the portfolio (Van Delsem, 2016). From the point of view of the risk averse investor,
high risk stocks would not be selected and safe investments would be considered includ ing
investing in bonds (Van Delsem, 2016).
Risk-averse investors may want to invest in corporate bonds which are likely to pay out a
steady dividend to investors. Corporate bonds are safer than investing in common stocks because
in the event that the company becomes insolvent, the bond investors would receive the first
payments over the shareholders from the remaining funds after creditors are paid off (Egan, 2015).
The two primary risks faced by bonds include interest rate risk and credit risk (Egan, 2015).
Interest rate risk is the risk that occurs from the sensitivity of bond durations, prices, and the impact
of rate fluctuations. When interest rates rise, the bond prices will fall and the longer the maturity
date, the more sensitive the bond is to expected changes in interest rates (Egan, 2015). The second
risk pertains to credit ratings, or the risk that the Company may default by either not paying its
coupons or principal or by filing bankruptcy (Egan, 2015). The ratings agencies such as Fitch and
Moody’s provide ratings on bonds and issuers with the lowest ratings are viewed as more likely to
default on their payments, yet pay higher premiums over the rate offered on U.S. Treasury bonds
to incentivize investors to take on the higher risk (Egan, 2015).
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
The More Years to Maturity the Higher the Interest Rate Risk
Apple, Inc.
Caterpillar, Inc.
Bond Face Value = FV = -$1,000.00
Bond Face Value = FV =
-$1,000.00
Coupon Payment
-$1,046.50
Coupon Payment
-$1,034.00
Coupon Rate =
4.65%
Coupon Rate =
3.40%
n=
1
n=
1
Apple, Inc.
YTM
5%
10%
15%
20%
1
28
Time To Maturity
years = 1 years=28
$1,949.05 $15,845.98
$1,860.45 $9,808.67
$1,779.57 $6,857.29
$1,705.42 $5,206.82
Caterpillar, Inc.
YTM
5%
10%
15%
20%
1
6
Time To Maturity
years = 1
years = 6
$1,937.14 $5,994.48
$1,849.09 $5,067.81
$1,768.70 $4,345.48
$1,695.00 $3,773.48
Con-Ed, Inc.
Bond Face Value = FV =
-$1,000.00
Coupon Payment
-$1,039.50
Coupon Rate =
3.95%
n=
1
NTRS, Inc.
Bond Face Value = FV =
-$1,000.00
Coupon Payment
-$1,034.50
Coupon Rate =
3.45%
n=
1
Con-Ed, Inc.
YTM
NTRS, Inc.
YTM
5%
10%
15%
20%
1
25
Time To Maturity
years = 1
years = 25
$1,942.38 $14,945.96
$1,854.09 $9,527.88
$1,773.48 $6,749.86
$1,699.58 $5,153.50
Macy's, Inc.
Bond Face Value = FV =
Coupon Payment
Coupon Rate =
n=
Macy's, Inc.
YTM
5%
10%
15%
20%
-$1,000.00
-$1,051.30
5.13%
1
5%
10%
15%
20%
1
2
Time To Maturity
years = 1
years = 2
$1,937.62 $2,830.59
$1,849.55 $2,621.86
$1,769.13 $2,437.94
$1,695.42 $2,274.93
Corporate Bond Credit Ratings
Apple, Inc. (AAPL)
Caterpillar (CAT)
1
24 Consolidated Edison (ED)
Time To Maturity
Northern Trust (NTRS)
years = 1
years = 24 Macy’s (M)
$1,953.62 $14,816.58
$1,864.82 $9,547.19
$1,783.74 $6,798.76
$1,709.42 $5,202.96
Moody's S&P
Aa1/AA+
A3/A
A2/AA2/A+
Baa3/BBB-
46
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
From the above selected corporate bonds, Apple, Con-Ed, and Macy’s have longer
maturities which present a greater level of risk, where, Caterpillar, and NTRS have shorter maturity
dates which would make the investment less subjected to interest rate risk. Macy’s was also ranked
a lower score by the ratings agencies which leaves its bonds more risky to invest in.
III. Executive Summary:
XYZ Tech Company is seeking potential investment opportunities in the following
companies: Apple, Inc. (AAPL), Caterpillar, Inc. (CAT), Consolidated Edison (ED), Northern
Trust, Inc. (NTRS), and Macy’s, Inc. (M). The investment analysis report of the aforementio ned
consists of information and parameters along with results from financial database research with
the goal of generating the maximum rates of return within the given risk class.
A. These Investments Will Position XYZ To Generate An Attractive
Absolute And Relative Investment Performance.
Making these investments will position XYZ Tech Company to generate an attractive level
of absolute and relative investment performance. The absolute performance measures the amount
of returns that an asset achieves over a given period of time and expressed as a percentage. Apple,
Caterpillar, and NTRS, provide the greatest percentages of annual and monthly returns when
looking at financial data pulled from the periods January 1, 2014 to May 1, 2018 (Yahoo Finance,
2018). Whereas, Con-Ed and Macy’s were lowest in performance. The investment performance
results have shown average annual returns of 25.44%, 19.28%, and 16.75%, and average monthly
returns of 0.44%, 0.48%, and 0.31% respectively. Whereas, Con-Ed and Macy’s produced average
annual returns of 11.88% and -0.23%, and average monthly returns of 0.99% and -0.02%
respectively. When looking at the historical variances, the stocks with the lowest variances
typically generate returns that are closer to its average. A stock with a higher variance can generate
47
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
returns that are significantly higher or lower than expected which can increase the level of
uncertainty and the risk of losing money.
AAPL
2.12%
0.44%
25.44%
5.23%
Average Monthly Returns
Monthly Variance
Average Annual Return
Annual Variance
CAT
1.61%
0.48%
19.28%
5.77%
ED
0.99%
0.27%
11.88%
3.19%
NTRS
1.40%
0.31%
16.75%
3.78%
M
-0.02%
0.98%
-0.23%
11.72%
Absolute Performance of M, NTRS, ED, CAT, and AAPL
from 01/01/2014 to 05/01/2018
Annual Variance
Average Annual Return
Monthly Variance
Average Monthly Returns
-5.00%
0.00%
5.00%
M
10.00%
NTRS
ED
15.00%
CAT
20.00%
25.00%
30.00%
AAPL
The relative return on the investments provides insights into the performance of each asset
relative to a benchmark which in this case is the S&P 500. The relative returns consider the return
of investment less the absolute return of the benchmark.
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Relative Return Performance for S&P, AAPL, CAT, ED, NTRS
& M from 01/01/2014 to 05/01/2018
20.00%
15.00%
10.00%
5.00%
0.00%
-5.00%
-10.00%
-15.00%
S&P 500
AAPL
CAT
ED
NTRS
M
Average Monthly Returns
0.78%
1.34%
0.83%
0.21%
0.62%
-0.80%
Monthly Variance
0.08%
0.35%
0.40%
0.18%
0.23%
0.90%
Average Annual Return
9.36%
16.08%
9.92%
2.52%
7.39%
-9.59%
Annual Variance
0.97%
4.26%
4.80%
2.22%
2.81%
10.75%
Average Monthly Returns
Monthly Variance
Average Annual Return
Annual Variance
B. The Benefits Of The Investments To Stakeholders.
There are several benefits to the stakeholders when a corporation invests heavily in stocks,
bonds, and other securities. One most significant benefit is that the investments may increase the
firm’s overall net worth by taking a portion of the Company’s capital in high-yield securities (John,
2018).
There are other defensive protections for the XYZ’s assets by investing in safer funds.
This is additionally much safer than investing the firm’s excess cash in a bank, since the FDIC has
insurance limitations and any funds in excess may be lost if the bank files for bankruptcy (John,
2018). Investments are also a beneficial source of income during an economic downturn when
consumer spending decreases thus leading to a decline in total revenues. Investing some of the
firm’s cash into securities provides the corporation with a steady income stream by using securities
to generate revenue when normal business activities do not produce as much income (John, 2018).
The firm can be protected from an economic downturn by investing some of its assets in securities
from other industries and sectors, as well as hedging against a national recession by investing in
49
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
foreign securities or commodities like oil and gold (John, 2018). When revenues are increasing,
the firm would have surplus cash in which investments would not suffer greatly in the event that
the securities drop in value. On the contrary, significant returns could be generated for the
corporation when high risk investments actually rise in value (John, 2018).
C. Investment Performance
As of May 1, 2018, Apple, Inc. is most likely to outperform the market when compared to
the other four investments. In 2017, the Company had Dividends Per Share (DPS) of 2.46 USD
which represents an increase when compared to the previous year 2016 of 2.23 and an average
growth rate of 9.84 percent. In 2017, Apple’s reported annual EPS was 9.27 per share with a
forecasted growth rate of 14.36 percent. In 2017, Caterpillar, Inc. had DPS of 3.10 USD which is
an increase from 2016 where DPS was 3.08 and an average growth rate of 6.16 percent. However,
during the past three years, the average EPS growth rate was -31.40 percent per year which is a
concern that the Company could be losing money. However, EPS in 2018 was 3.68 up from 1.27
in 2017 and a sign of improvement. In 2017, Con-Ed had DPS of 3.10 and performs below the
industry average. The Company’s average DPS growth rate is approximately 6.16 percent. In
2017, Con-Ed reported annual EPS of 4.97 which was an increase when compared to 2016 where
EPS was 4.15 and an average growth rate of 4.11 percent. Overall the Company performs lower
than the industry average mainly due to its location in a heavily regulated environment of New
York. In 2017, Northern Trust had 2017 DPS of 1.60 which increased from 1.48 in 2016 and has
an average growth rate of 6.81 percent. The Company reported annual 2017 EPS of 4.59 which is
an increase when compared to 4.35 in 2016 and an average growth rate of 3.88 percent. Macy’s
is the lowest performing stock in the portfolio with 2017 DPS of 1.51 up slightly from 2016 where
DPS were 1.49, and has an average growth rate of 12.45%. EPS have shown a steady decline for
50
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
the past three years 2015, 2016, and 2017 which were 4.30, 3.26, and 2.01 respectively, and a
negative growth rate.
The following revenue forecasts show growth metrics for Apple, Caterpillar, Con-Ed,
Northern Trust, and Macy’s.
Forecasted Revenue Earnings Growth for AAPL, CAT,
ED, NTRS, & M
40.00%
30.00%
20.00%
10.00%
0.00%
-10.00%
-20.00%
-30.00%
-40.00%
2017
2018
2019
2020
5 Years
AAPL
9.27%
CAT
-30.06%
11.43%
1.70%
5.05%
10.89%
3.64%
30.79%
0%
4.25%
ED
NTRS
4.07%
4.23%
3.38%
0%
4.00%
34.63%
6.68%
8.25%
0%
11.66%
M
-13.26%
6.42%
5.60%
0%
8.50%
AAPL
CAT
ED
NTRS
M
In 2017, both Northern Trust and Apple experienced the highest levels of revenue growth
with rates of 34.63 percent and 9.27 percent respectively, where Con-Ed had the lowest growth
rate of 4.07 percent, where both Caterpillar and Macy’s had negative growth rates of -30.06 percent
and -13.26 percent respectively (Nasdaq, 2018). In five years from now, NTRS, Apple, and
Macy’s are expected to have the highest growth at rates in the portfolio of 11.66 percent, 10.89
percent, and 8.50 percent respectively (Nasdaq, 2018).
The following analysis and forecasts show price to earnings ratio (P/E) metrics for Apple,
Caterpillar, Con-Ed, Northern Trust, and Macy’s.
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Forecasted Price/Earnings Ratios for AAPL, CAT, ED,
NTRS, & M
25
20
15
10
5
0
AAPL
CAT
ED
NTRS
M
2017
20.72
22.26
17.89
22.14
11.27
2018
16.71
14.29
18.35
16.45
12.99
2019
14.95
12.8
17.42
15.41
12.21
2020
13.55
11.81
16.66
14.24
11.55
2017
2018
2019
2020
The P/E ratio is the ratio used for valuing the Companies’ current share price relevant to
its EPS. In general, higher ratios suggest that investors will expect higher earnings growth in the
future when compared to other Companies in the portfolio. In theory, the median of P/E over a
period of years could formulate a standardized ratio which could be used as a benchmark in order
to determine which stocks should be invested in. In this case, Con-Ed, NTRS, and Apple had the
highest median P/E ratios of 17.66, 15.93, and 15.83, where Caterpillar and Macy’s had the lowest
median ratios of 13.55 and 11.88 respectively.
D. Investment Performance Based On Risk/Return Metrics.
One of the key principles of investing is the risk-return tradeoff which is defined as the
correlation between the level of risk and the level of potential return of the investment (Horton,
2018). By accepting a higher level of risk or volatility, it is likely that there will be a greater
potential for higher returns. When constructing the portfolio, the beta, the standard deviation, and
the Sharpe ratio metrics were evaluated in order to minimize risk and maximize returns. For an
optimal risky portfolio, it is recommended that higher weightings be allocated toward Apple and
52
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
Caterpillar since the betas were 1.11 and 1.59 respectively. A beta of 1 means that the underlying
investments move in line with the market index, which in this was the S&P 500. Although a higher
beta would result in more volatility than the S&P, it is likely that these two companies would
produce the highest returns. The remaining companies in the portfolio, Macy’s, Consolidated
Edison, and NTRS, had betas below one which has fewer fluctuations over time and the least
amount of risk, meaning that returns would be lower as a result of less volatility. In addition to
beta, the standard deviation was calculated to show its volatility and risk-reward trade-off. The
standard deviation of the constructed portfolio was generally lower than the standard deviation for
each of the individual investments aside from Macy’s which was slightly above, which is a sign
that risk would be minimal due to the diversification benefits of investing in multiple stocks. The
Sharpe Ratio of 1.52 compared the performance of a risk-free investment using the three-month
T-Bill. Since the ratio of the portfolio was maximized to greater than 1, it depicts a return that is
greater than expected for the level of risk assumed (Horton, 2018).
E. The Strategies In The Portfolio Meet XYZ’s Investment Objectives.
The strategies in the portfolio meet XYZ’s investment objectives because it reduces risk
by selecting a variety of stocks and bonds that are likely to change in value in different ways or at
different times.
The process under MPT is known as diversification which means taking on
advantages of the differences in risks among the investments in Apple, Consolidated Edison,
Caterpillar, Northern Trust, and Macy’s. These investments tend to change in value and at varying
times and directions. Therefore, since the portfolio consists of several types of investments, only
a smaller percentage of value would be lost as opposed to investing in only one company. Through
a diversified portfolio, the severity of any losses would be reduced which would maximize the
total return on investment. Overall, the optimal risky portfolio structure diversifies the investme nts
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Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
while also providing the highest returns on the best investments, though it may risk losing value
under opposite conditions. However, the risks would be offset by investing in other companies that
may perform well under the same conditions. Furthermore, combining stocks with bonds will
further minimize risks since stocks tend to move in the opposite direction of bonds when interest
rates change under the same conditions.
54
Fin 640: Final Project: XYZ Tech Company: Investment Analysis Report
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