Carl Heuser Case Scenario
Carl Heuser is senior equity analyst with Kaleidoscope AG, a specialized Austrian research company. Heuser has recently assumed responsibility for the global food and beverage industry and is preparing an industry study. A colleague, Joseph Mayer, who is working on parts of the report, asks why Heuser places so much emphasis on valuation, given that in efficient markets prices correctly reflect fair market values. Heuser states that valuation models help:
? determine objective prices.
? estimate intrinsic stock values.
? assess the impact of corporate events.
? infer market expectations reflected in prices.
Mayer also questions the use of relative valuation models. He argues that absolute valuation models help determine an asset’s intrinsic value, whereas relative valuation models specify an asset’s value relative to another asset or a benchmark value.
Heuser is focusing his analysis on chilled foods, because he classifies this sub-industry to be in the growth phase of its life cycle. He investigates French Belle Cuisine S.A. and American Fast Foods, Inc. Belle Cuisine makes branded products served in private hospitals. In this niche market, Belle Cuisine strives to remain the quality leader at reasonable production costs. In contrast, American Fast Foods is a mass-market producer. Its success is based on reasonable quality with highly cost-efficient production. Heuser gathers financial information, shown in Exhibit 1, about both companies.
Analyzing the competitive forces within the chilled foods sub-industry, Heuser finds that Belle Cuisine, American Fast Foods, and their various competitors buy ingredients from a large number of suppliers. Although both companies currently experience above industry average operating returns, Heuser notes that Belle Cuisine depends on five private hospital groups for more than 75 percent of its sales. American Fast Foods, on the other hand, sells to a broad range of customers throughout the country. In his study Heuser rates the chilled foods sub-industry to be attractive for investors because, considering the industry structure, companies can capture a high proportion of the product value created. He states that the:
? industry growth is an element in determining rivalry.
? absence of supplier concentration keeps input factor costs low.
? buyer propensity to substitute reduces intensity of rivalry. Finally, Heuser makes the following two concluding statements: (1) The sustainable growth rate of both Belle Cuisine and American Fast Foods is the same and from that perspective both firms are equally attractive.
(2) On the basis of intrinsic price-to-earnings (P/E) ratio, however, American Fast Foods is more attractively priced than Belle Cuisine.
Mayer, however, expresses his concern regarding the attractiveness of the chilled foods sub- industry. He considers it is in the pioneering stage of the industry life cycle because:
? it is still at risk for many business failures.
? product acceptance is established.
? shifting consumer tastes drive the sub-industry.
37. Mayer’s arguments concerning absolute and relative valuation models are most accurate with respect to:
A. both types of models.
B. relative valuation models only.
C. absolute valuation models only.
Answer: A
“The Equity Valuation Process,” John D. Stowe, CFA, Thomas R. Robinson, CFA, Jerald E. Pinto, CFA, and Dennis W. McLeavey, CFA 2009 Modular Level II, Volume 4, pp. 27-30 Study Session 10-34-g
Contrast absolute valuation models to relative valuation models.
Mayer’s arguments concerning both statements are consistent with those two types of valuation models. Absolute valuation models specify an asset’s intrinsic value and relative valuation models specify an asset’s value relative to that of another asset.
38. Based on DuPont analysis, American Fast Foods’ higher return on equity, compared to that of Belle Cuisine, is due most likely to American’s:
A. lower tax burden.
B. higher asset turnover.
C. higher net profit margin.
Answer: B
“Equity: Concepts and Techniques,” Bruno Solnik and Dennis McLeavey, CFA 2009 Modular Level II, Volume 4, pp. 173-175 Study Session 11-37-e Evaluate two common approaches of equity analysis (ratio analysis and discounted cash flow models including the franchise value model) and demonstrate how to find attractively priced stocks by using either of these methods.
The higher asset turnover is the primary reason for American Fast Foods’ higher ROE. Its asset turnover is 0.8889 versus 0.60 for Belle Cuisine.
39. Which of the following best describes Belle Cuisine’s bargaining power of buyers and suppliers? The bargaining power of:
A. both buyers and suppliers is low.
B. buyers is high but that of its suppliers is low.
C. suppliers is high but that of its buyers is low.
Answer: B
“The Five Competitive Forces That Shape Strategy,” Michael E. Porter 2009 Modular Level II, Volume 4, pp. 205-207 Study Session 11-38-a, b
Distinguish among the five competitive forces that drive industry profitability in the medium and long run. Illustrate how the competitive forces drive industry profitability.
Given that Belle Cuisine can source its ingredients from many suppliers the effect of their bargaining power is low (because they hardly have bargaining power). Confronted with few important customers (selling 75 percent to five customers) the effect of its buyers’ bargaining power is high.
40. With regard to capturing product value created as a result of industry structure, Heuser’s least accurate statement relates to:
A. industry growth.
B. supplier concentration.
C. buyer propensity to substitute.
Answer: C
“The Five Competitive Forces That Shape Competitive Strategy,” Michael E. Porter
2009 Modular Level II, Volume 4, pp. 205-208, 212-213
Study Session 11-38-b Illustrate how the competitive forces drive industry profitability.
Buyer propensity to substitute increases intensity of rivalry instead of reducing it as stated by Heuser.
41. In regard to Heuser’s two concluding statements, it is most accurate to say that he is:
A. correct with respect to both statements.
B. incorrect with respect to both statements.
C. correct with respect to statement (2) but not statement (1).
Answer: B
“Equity: Concepts and Techniques,” Bruno Solnik and Dennis McLeavey, CFA 2009 Modular Level II, Volume 4, pp. 173, 176-178
“Discounted Dividend Valuation,” John D. Stowe, CFA, Thomas R. Robinson, CFA, Jerald E. Pinto, CFA, and Dennis W. McLeavey, CFA. 2009 Modular Level II, Volume 4, pp. 327-329
Study Session 11-37-e; 11-41-o Evaluate two common approaches of equity analysis (ratio analysis and discounted cash
flow models including the franchise value model) and demonstrate how to find attractively priced stocks by using either of these methods.
Define, calculate, and interpret the sustainable growth rate of a company, explain the calculation’s underlying assumptions, and demonstrate the use of the DuPont analysis. As the following computations show, the sustainable growth rates of Belle Cuisine and American Fast Foods are different which makes statement (1) incorrect. Further, the intrinsic P/E of American Fast Foods is higher at 8.3 compared to 5.7 for Belle Cuisine making American Fast Foods less attractive relative to Belle Cuisine. Thus, statement (2) is also incorrect.
| |
Belle Cuisine |
Amer. Fast Foods |
| ROE = NI/Equity |
15.0% |
18.6% |
| g = ROE (1 - Payout Ratio) |
15.0 (1 - 0.40) = 9.0% |
18.6 (1 - 0.40) = 11.2% |
Intrinsic P/E = Payout Ratio / (r - g)
= (1 - b) / [r - (b x ROE)] |
0.40 / (0.16 - 0.09) = 5.7 |
0.40 / (0.16 - 0.112) = 8.3 |
42. In the context of the industry life cycle, Mayer’s classification of the chilled food sub-industry is best supported by his argument relating to:
A. business failures.
B. product acceptance.
C. shifting tastes driving the sub-industry.
Answer: A
“Industry Analysis,” Jeffrey C. Hooke 2008 Modular Level II, Volume 4, pp. 226-228 Study Session 11-39-b Illustrate the life cycle of a typical industry.
The pioneering stage is characterized by many business failures.
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发表于 2009-7-2 13:57
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