Investment Analysis
Introduction
As a fund manager with $300 million under my watch and given that the fund I am managing is a pension/retirement fund, my investment strategy shall be long term with moderate risk of capital. In this case I have taken into consideration that the investment of $25 million, which is part of the 12 equal investments I will make, must be made in a company with strong fundamentals and superior management. In this presentation, I submit my case with regard to the company I have decided to invest the $25 million in. My presentation here is informed by a detailed analysis of the company based on amongst other things the firm’s business strategy, accounting analysis, financial analysis as well as prospective analysis.
Business strategy Analysis
M&T Bank is also one of the 20 largest commercial bank companies in the United States of America and has an impressive branch network of more than 750 branches scattered all over America including in New Jersey, Delaware, Washington, Virginia etc. As of 31st Dec 2009, M&T Bank had an asset base worth $69 billion. Over time the bank’s growth has been impressive and it has bank has successfully undertaken acquisitions which currently stand at 20 since it was founded in 1856.
When it comes to the three differentiation strategies, M&T Bank utilizes the low cost provider strategy. According to Pacek (2007), by using the low cost provider strategy, a company basically seeks to come up with policies that make it the lowest cost distributor or producer across the industry. By being one of the most diversified banks in the industry, M&T Bank ensures that it is a one stop shop for all banking products. It hence gains from economies of scale given its huge customer base. Kirkpatrick (2010) notes that for the last one decade, M&T Bank has been coming up with policies to control overhead costs and minimize or lower operating expenses. It has in turn benefited by becoming the low cost leader in Regional-Northeast Banks industry and wider financial services sector.
Currently, the bank has a full time employee base of 12,802 and it is in the process of reducing its labor costs. It is also important to note that as a deliberate move to further underscore its low cost leadership, the bank has keen on coming up with an advantage that cannot be easily replicated by other players in he marketplace. This includes but is not limited to a substantial investment in technology to further improve its efficiency and lower costs.
Accounting analysis
It is quite in order to note from the onset that the accounting practices adopted by M&T Bank basically reflect a true and accurate picture of the bank’s economic performance. For instance, a look at the bank’s second quarter results shows that the earnings (diluted) per common share were recognized in accordance to GAAP provisions. The diluted earnings per common share for this period (2010 2nd quarter) rose by a huge percentage i.e. 306% to stand at $1.6 up from $.36 in the same period last year (2009 2ndquarter). Indeed, this was a 27% improvement from the reported 2010 1st quarter which was reported as $1.15.
The net income was also presented in accordance to the Generally Accepted Accounting Principles (GAAP) provisions. The income (net) in this period is reported as $189 million. This is indeed an improvement from the first quarter results (2010) which stood at $151 million. To show where the bank is headed, it may be quite in order to keep in mind that the performance in terms of the GAAP basis net income of the bank in the same period a year ago which was reported as $51 million i.e. during the 2nd quarter of 2009 was way below the current performance.
However, it may be important to note that M&T Bank avails its net operating results in its supplemental reports. The bank excludes from its supplemental reporting results the amortization’s after-tax effect of deposits (core) as well as other gains and expenses as the bank’s management is of the opinion that such items are non-operating in nature. The results here are Non-GAAP because the definition of net operating income as brought out by M&T Bank cannot be taken to be a GAAP measure. However, M&T Bank’s management is of the opinion that such information is critical to investors for purposes of helping them appreciate the effects of acquisition activity as far as the results reported are concerned.
Financial analysis
An analysis of the bank’s financial ratios paints a positive picture going forward. According to Chan (2010), financial ratios are critical as indicators of the financial situation of a given firm. The financial ratios I present here shall be informed as well as based on the information availed by M&T Bank’s financial statements as at Dec 31st 2008 and Dec 31st 2009. It is important to note that as Fabozzi (2009) argues, financial statements can be classified as per the information they glean. Amongst other ratios, my analysis of M&T Bank herein covers four profitability ratios. Profitability ratios basically concern themselves with measuring a company’s success as far as profit generation is concerned (Plunkett 2008).
The gross profit margin
This ratio is basically a gross profit measure on sales. In this case, it is a gross profit measure on total revenue. A look at the ratio in relation to the two year forecasts shows an improvement of gross profits in relation to total revenue from 0.84 in 2008 to 0.91 in 2009.
For the year ended Dec 31st 2008
The gross profit margin = total revenue – cost of revenue = 4,401,774 – 665,849 =
Total revenue 4401774
= 0.84
For the year ended Dec 31st 2009
The gross profit margin = total revenue – cost of revenue = 3773303-322283 = 0.91
Total revenue 322283
Return on assets
This is basically a measure of the effectiveness of utilization of a firm’s asset to generate profits.
For the year ended Dec 31st 2008
Return on assets = net income =579891 = 0.008
Total assets 65,815,757
For the year ended Dec 31st 2009
Return on assets = net income =855,887 = 0.005
Total assets 68,880,399
Return on equity
This is one of the most profitability ratios according to Arouri (2010) and it measures profits made from each single dollar invested in any given company. In this case, to stands at 12% in 2009 up from 7.4 % in 2008.
For the year ended Dec 31st 2008
Return on equity= net income =579891 = 0.074
Shareholders equity 7,752,907
For the year ended Dec 31st 2009
Return on equity= net income = 855,887 = 0.126
Shareholders equity 6,784,731
Profit margin
The profit margin ratio is basically a ratio of net income to sales or total revenue in this case.
For the year ended Dec 31st 2008
Profit margin = net income/ sales (total revenue) = 579891/ 4,401,774 = 0.12or 12%
For the year ended Dec 31st 2009
Profit margin = net income/ sales (total revenue) =855,887/ 3773303= 0.10or 10%
Current ratio
The current ratio in simple terms is the ratio of current assets to current liabilities.
For the year ended Dec 31st 2008
Current ratio = current assets/ current liabilities = 3962012/46,955,877 = 0.084
For the year ended Dec 31st 2009
Current ratio = current assets/ current liabilities = 13291863/50887476 = 0.26
Cash ratio
The cash ratio looks at the readiness of a company to settle its current liabilities.
For the year ended Dec 31st 2008
Cash ratio= cash + marketable securities/current liabilities =
2,174,909+ 60,198/ 46,955,877 = 0.047
For the year ended Dec 31st 2009
Cash ratio= cash + marketable securities/current liabilities =
9,160,286+ 60,198/ 50887476= 0.181
Debt ratio
This is the ratio of total debt to total assets.
For the year ended Dec 31st 2008
Debt ratio= total debt/total assets = 12,075,149/65,815,757 = 0.18
For the year ended Dec 31st 2009
Debt ratio= total debt/total assets = 16,105,150/68,880,399 = 0.23
Debt to equity ratio
As opposed to the debt ratio, the debt to equity ratio is the ratio of total debt to total equity.
For the year ended Dec 31st 2008
Debt to equity ratio= total debt/total equity = 12,075,149/6,784,731= 1.78
For the year ended Dec 31st 2009
Debt to equity ratio= total debt/total equity = 16,105,150 /7,752,907= 2.07
Dividend yield
For the year ended Dec 31st 2008
Dividend yield = dividend per share/share price = 0.65/0.85 = 0.76
For the year ended Dec 31st 2009
Dividend yield = dividend per share/share price = 0.70/77.47 = 0.009
Payout ratio
For the year ended Dec 31st 2008
Payout ratio = dividends per share/ earnings per share = 0.65/ 2.4 = 0.2
For the year ended Dec 31st 2009
Payout ratio = dividends per share/ earnings per share= .70/3.0 = 0.2
Prospective analysis
A look at the banks history shows that from the late 1970’s, M&T Bank has been improving in profitability every quarter. It is hence clear that the company has demonstrated a consistent earning capacity and chances are hat this trend will carry going forward. It is important to note that M&T Bank was one of the banks that were able to wither the effects of the global economic meltdown. Indeed, Stowell (2010) notes that in the S&P 500, there were only two banks that did not decrease their dividends. If this trend continues therefore, it is clear that M&T Bank will be a safe investment and with that in mind, the $25 million investment we make in the bank shall be expected to bring in a substantial amount of both capital and revenue gains over time. However, all this is dependent on the banks ability to continue raking in more profits every quarter as has been the case since the late 1970s.
Similarly, it is important to note that M&T Bank has been having a consistent return on equity which according to Drake (2010, June) is one of the most important things to look out fore before making an investment. A look at the return on equity of the bank shows a sustained increase of the same in the financial year ending Dec 31st 2009. A higher return on equity basically means that once we make the initial investment of the $25 million, we as shareholders will not be compelled to invest more capital as the retained earnings shall be utilized for purposes of improving the operations of the bank. It also means that M&T Bank shall not have to borrow to sustain its operations. It is also important to note that the M&T Bank has an acceptable return on equity when compared to the other industry players (Jawadi 2010, April).
When it comes to the management f the bank, M&T Bank has indicators of a well managed institution. This can be gleaned from the superior use of retained earnings. For instance Nguyen (2010, Feb) notes that M&T Bank has consistently used its retained earnings from the late 1970s to improve its profitability through acquisitions. Among the banks M&T Bank has bought in the recent past include Wilmington trust. Through acquiring banks, M&T Bank can be able to enhance its expansion and increase its branch network. This means that by the wise utilization of retained earnings, we are likely to get substantial capital gains for any investment we make in the long-term. However, this is based on the assumption that the management shall retain its ability to use retained earnings wisely in future. According to Will (2010, July), any investor should wish that his earnings be re-invested only when they can be expected to rake in more returns. On the flipside, any investor would wish that his earnings be distributed inform of dividends if when reinvested by the given company they shall not bring in satisfactory returns.
It may also be important to note that M&T Bank does not have a huge amount of debt. Will (2010, July) notes that this is what may have helped the bank to wither the global economic meltdown storm so well. With that in mind, making investment in a such a company with little debt means that any increase in interest rates shall not affect its profits drastically and this hence means that its cash flows in future are more or less easy to predict. However, it is important to note that the comfortable debt level of the bank as at the moment is largely dependent on the banks ability to sustain its profitability and as such make more use of retained earning as opposed to debt for purposes of financing its various operations (Ashworth 2010, August).
Conclusion
Based on the prospective analysis as well as the financial analysis, it appears to me that an investment worth $25 million in M&T Bank will be of benefit to the fund. The consistent profitability of M&T Bank for over three decades and the fact that its fundamentals are sound as shown by a majority of the financial ratios discussed in the financial analysis section means that such an investment would be quite in order for our pension/retirement fund whose perspective is long-term with moderate risk of loss of capital. Additionally and most importantly, M&T Bank’s return of 12.6% is consistent with the fund’s 9% required return per annum.
References
Arouri, M.E. (2010). The Dynamics of Emerging Stock Markets: Empirical Assessments and Implications. Springer
Ashworth, W. (2010, August) Investing today. Journal of banking and finance, 67, 112-122
Chan, J. (2010). Essentials of Technical Analysis for Financial Markets. John Wiley and Sons
Drake, P.P. (2010, June). Investment analysis and market behavior. Journal of
accounting, auditing and finance, 55, 112-145
Pacek, N. (2007). Emerging markets: lessons for business success and the outlook for different markets. Bloomberg Press
Kirkpatrick, C.D. (2010). Technical Analysis: The Complete Resource for Financial Market Technicians. FT Press
Fabozzi, F.J. (2009). Finance: capital markets, financial management, and investment management. John Wiley and Sons
Fabozzi, F.J. (2009). Bond markets, analysis, and strategies. Pearson/Addison-Wesley
Plunkett, J.W (2008). Plunkett’s Banking, Mortgages and Credit Industry Almanac 2009: Banking, Mortgages and Credit Industry Market Research, Statistics, Trends and Leading Companies. Plunkett Research, Ltd
Stowell, D. (2010). An Introduction to Investment Banks, Hedge Funds, and Private Equity: The New Paradigm. Academic Press
Jawadi, F. (2010, April). Banking today. Journal of asset management, 12, 234-239
Nguyen, D.K. (2010, Feb). Credit Crisis. Journal of business, 16, 27-36
Will, A.J. (2010, July). Performance forecasts. Journal of banking and finance, 68, 90-98
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