A Case Study about Determinants of Price-Earnings Ratio: Chemical Sector of Pakistan
Abstract: Price-to-Earnings (P/E) ratio, a relative valuation technique has always remained at the centre of attention of market analysts and investors ever since the origin of discounted dividend growth model of Gordon and Shapiro (1956). The present study attempts to identify the factors explaining variations in P/E ratio for chemical sector of Pakistan by using Ordinary Least Square (OLS) regression on pooled data of 25 firms listed at Karachi stock exchange for the period 2005 to 2009. Furthermore, taking into account the volatility in Pakistani stock market during the study period, a time-series analysis has also made by using OLS regression model to examine whether determinants of P/E ratio differ across years or not.
Introduction: Considerable research has focused on analyzing the stock market performance using different financial ratios for example Price-to-Earnings (P/E) ratio, Price-toSales ratio, Price-to-Dividend ratio and Book-to-Market ratio (Bodie et el., 2005). However, researchers, market analysts, fund managers and investors mostly rely on Price-to-Earnings ratio for analyzing relative attractiveness of equity investments and use it as a valuation technique for performance evaluation of individual stocks, sectors and markets (Molodovsky 1953). P/E ratio, measured as dividing stock price by earnings per share, alternatively known as “Price Earnings Multiples”, indicates how much investors are willing to pay for each rupee of firm’s earnings.
Apple Computer has had a very good run, both in terms of accounting profits and tock prices. Based largely on the success of the iPod, the iPhone and the iPad, the company has reported double digit growth in revenues and earnings over the last few years (see exhibit 1) and its stock price has reflected this success (see exhibit 2).
It has a substantial cash balance and a strong balance sheet (see exhibit 3 for balance sheet information). However. Steve Jobs, CEO of Apple, is concerned that the halcyon days of the iPod are past and that potential challengers loom on the horizon (Sony, Zune etc.). Apple is considering entering the television market with an innovatively designed and technologically state-of-the art LCD television, called the iTV, aimed at the upper end of the market.
Abstract: This study analyses the performance of European football clubs which undergo an initial public offering (IPO). We use a unique time-series and cross-section dataset consisting of domestic and international performance data to develop an event study to investigate the effects of a football club’s on-field performance before and after the IPO.
The study follows from the observation that, as financial markets are expected to exhibit a positive influence on the economy as a whole, football clubs who access these markets should benefit as well. However, the conclusions of our study are similar to those in the corporate finance literature, where firms who undertake an IPO find their stock price underperforming similar firms in the medium term. Using our metric, football clubs have a diminished domestic and international performance after the stock market listing. Click here to read more…
With its dominance of the athletic shoe and sporting apparel businesses, Nike generated $2.81 billion in operating income on revenues of $20.9 billion in the fiscal year that ended in May 2011. While its stock price has rebounded in the last three years (see Exhibit 1), its sales and earnings are being affected by increased competition from both established firms (like Reebok and Adidas) and upstarts (such as Under Armour).
Exhibit 2 summarizes Nike’s income statement for the last 4 years, and Exhibit 3 summarizes its balance sheet for the last 2 years. Nike, which currently views itself as operating in the sporting wear (shoes and clothes) segment, is considering an expansion into the fashion apparel business, producing high-priced casual clothing for teenagers and young adults…Click here to read more…
Abstract Payless ShoeSource was created in 1956 and is currently the largest discount shoe retailer in America. In 2003 the Company experienced its first loss in five years. After that year, the Company worked hard to increase sales and correct the inventory problems. From 2004 through 2006 sales were increasing as cost of goods sold was decreasing. By the end of 2006, the stock price had reached an all time high and Payless was standing out among competitors and in the industry. Click here to read more…
Hornbeck Offshore Services (Hornbeck) is a leading provider of technologically advanced, new generation offshore supply vessels primarily in the U.S. Gulf of Mexico and select international markets, and is a leading transporter of petroleum products through its fleet of ocean-going tugs and tank barges primarily in the northeastern U.S. and in Puerto Rico. After its successful initial public offering in March of 2004, Hornbeck was disappointed with the value of its stock price; therefore it turned to DRG&E, LLC to develop an investor relations marketing plan focused on attracting sell-side coverage, as well as enhancing its investor communications and marketing programs. Click here to read more…
A January Harvard Business School case study examines the development and systematic application of Morgan Stanley Research’s signature framework for Risk-Reward analysis and shows how equity analysts can use their knowledge of company and industry fundamentals to model scenarios and communicate their recommendations with a full view of risks and rewards.
Risk-Reward analysis identifies key investor debates, what’s reflected in the stock price, value drivers and a full range of plausible scenarios that clients need to reach investment decisions. Risk-Reward analysis is now systematically included in the fundamental research on 2,800 equities covered by Morgan Stanley Research.Click to read more.
The year 2005 had proved to be a year of exceptional achievements for the world’s number one home appliance brand company, Whirlpool. It had achieved record net earnings of $422 million on record sales revenues of $14.3 billion, which had in turn, propelled the company’s share price to an all-time high of $92.64 by April 2006.Much of Whirlpool’s performance was attributed to the new products and features introduced by the company, based on ideas received from the company’s employees working under the ‘innovation system’, established by the company’s former CEO, David Whitwam in 1999.
The innovation system was implemented to counter the company’s almost stagnant performance over the past decade, judging by everything from stock price to profit margin to market share. The company’s failure to introduce exciting products or product features had reduced Whirlpool’s machines to mere commodities and the prices of its most important products were falling each year. Following the implemetation of the innovation drive, revenues from products that fitted the company’s definition of ‘innovative’ increased from $10 million in 2001 to $800 million in 2005, i.e., 5 percent of the company’s record $14.3 billion in total revenue. In 2005 alone, Whirlpool launched more than twice as many new products in half the time, as compared to the time before the innovation process was launched. Click here to read more…
Odwalla (pronounced “odewalla”) is the health-conscious juice company which began a couple of decades ago when Greg Steltenpohl, Gerry Percy and Bonnie Bassett began squeezing fresh oranges on a $200 hand juicer. The company was growing strongly with annual sales rising 30% per year and approaching $90m. The company had established a strong brand with enormous customer loyalty.
On October 30, 1996, everything changed. Health officials in Washington state informed the company that they had discovered a link between several cases of E. coli 0157:H7 and Odwalla fresh apple juice.
The link was confirmed on November 5. As the crisis played itself out, one child died and more than 60 people in the Western United States and Canada became sick after drinking the juice. Sales plummetted by 90%, Odwalla’s stock price fell 34%. Customers filed more than 20 personal-injury lawsuits and the company looked as though it could well be destroyed.