FINC314 Lecture Notes - Lecture 6: Elon Musk, Irrational Exuberance, Activist Shareholder
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Assignment Please read the instructions carefully. You need to write 6 sentences for each article which includes what i have given in instructions.
Instructions
For the two articles below:
Write a few sentences explaining how the article is relevant to Verizon or Sprint Mobile. How and why would you expect it to affect stock prices, and whether they were affected in the way you expected (do this in terms of expected future earnings). Because traders buy or sell stocks immediately as new information becomes available, stock prices respond rapidly. Be sure to include the date of the article. You should be able to distinguish whether the news was relevant to only one of your stocks, your industry, or the whole market by noting the relative price changes - if only one of your stocks went up while the market was down, the news affected only your stock; if both your stocks moved differently from the market, the news probably affected your industry as a whole; if your stocks moved in tandem with the market, the news probably broadly affected the whole economy. You should also be able to explain why the news affected just one company, the industry, or the whole market. The articles selected should be balanced chronologically and topically.
Below are stock prices from Nov 16th through 19th
Verizon Communications Inc. VZ (U.S.: NYSE) | Sprint Corp. S (U.S.: NYSE) | |||||||||||
Time | close | S&P 500 | Time | Close | S&P 500 | |||||||
NOV | 16 | 4:03PM EST | 45.04 | 1.49 | 16 | 4:00PM EST. | 4.21 | 1.49 | ||||
17 | 4:00 | 45.08 | -0.13% | 17 | 4:03 | 4.4 | -0.13% | |||||
18 | 4:05 | 45.38 | 1.62% | 18 | 4:00 | 3.99 | 1.62% | |||||
19 | 4:00 | 45.76 | -0.11% | 19 | 4:00 | 4.05 | -0.11% | |||||
20 | 20 |
1.Sprint Promotion Sends Investors Running
The carrier should be more focused on improving profitability and free-cash-flow generation.
Updated Nov. 19, 2015 1:15 p.m. ET
Sprint (S: NYSE)
By Evercore ISI ($3.99, Nov. 19, 2015)After days of hinting at a âbig announcement,â Sprint released new pricing plans which offer a 50% discount to plans from T-Mobile US, Verizon Communications and AT&T -- while also covering up to $650 of switching costs.
If a 50% discount from Sprint (ticker: S) sounds familiar, thatâs because it is essentially the same as the companyâs earlier âcut your bill in halfâ promotion -- though, notably, this time it extends to T-Mobile ( TMUS ) customers as well as those from Verizon ( VZ ) and AT&T ( T). And, while this may drive some uptick in subscriber attraction, we note: 1) we believe the most cost-sensitive subscribers likely took advantage of this offer the first time around; 2) we do not agree with Sprintâs contention that transitioning subscribers are likely to opt for higher data plans versus the discounted offerings; and 3) the offer comes at a time when Sprint should be more focused on improving profitability and free-cash-flow generation (and is somewhat contradictory to other recent initiatives such as increasing unlimited pricing by $10 and attempting to cut $2.5 billion in annual costs from its budget). It is this last point -- on the impact to profitability -- that appears to have upset investors the most, sending Sprint shares down 9.3% Wednesday.
Prior to (and on) Sprintâs fiscal-second-quarter call, the company announced that it would seek to cut $2.5 billion in costs. We saw these costs cuts, along with Sprintâs decision to not participate in the 600 megahertz (MHz) auction, to use off-balance-sheet financing, and raise its unlimited pricing by $10, as evidence that Sprint was attempting to improve its cash flow position. However, as part of this current promotion, Sprint is offering up to $650 in reimbursements for early termination fees (ETFs) and other fees (provided you turn your phone in). Because we believe that the most cost-sensitive subscribers may have already taken advantage of this offer the first time around, the corresponding increase in subscriber traction may not be enough to offset the negative implications to profitability and free cash flow.
Sprint sees potential upside from more data, same price. The emphasis of the promotion is to cut your bill in half. Despite this, Sprint believes subscribers are likely to opt for the same nominal value plans, but twice the data. We do not agree. If Sprintâs intention was to see customers double their data, the pitch should have been âdouble your data,â not âtake 50% off.â
Customers can trial the offer for 28 days. If they are not satisfied, and have purchased a device through Sprint, they can return the device with no restocking fee. Importantly, the offer is for activations from Nov. 20 through Jan. 6 and the promotional pricing will run for 24 months. While the offer is available to new Sprint customers, current Sprint subscribers can get a free [Apple (AAPL)] iPad with one year of free service, if they sign a two-year contract. Sprint expects the iPad offer to reduce churn (as customers with more devices become âstickierâ).
Based on our last published model, our discounted-cash-flow-driven year-end 2016 price target is $4. [We rate Sprint at Hold.]
-- Jonathan Schildkraut
-- Justin Ages
The companies mentioned in Hot Research are subjects of research reports issued recently by investment firms. Their opinions in no way represent those of Barrons.com or Dow Jones & Company, Inc. Some of the reportsâ issuers have provided, or hope to provide, investment-banking or other services to the companies being analyzed. Share prices at the time the report was issued and the date of the report are in parentheses.
7:39 am ET
Nov 19, 2015
2.The Morning Download: Ford CEO Says
By
Steve Rosenbush
CONNECT
Good morning. Ford Motor Co. CEO Mark Fields says that wireless updates for vehicle software have more or less arrived. Thatâs going to lead to big changes in the way people build and use cars, which are bound to adopt more characteristics of mobile phones. CIO Journalâs Rachael King has the story.
Ford launched Sync Connect with the 2017 Ford Escape at the LA Auto Show this week. The platform lets drivers unlock or start the vehicles from their smartphones. âSync Connect will serve as the platform to offer over-the-air updates allowing us to go beyond the infotainment system such as updating other parts of the vehicle like the engine or driver-assist technologies,â said Mr. Fields, speaking at a press event Wednesday in San Francisco.
Wireless updates mean that phones donât have to be brought into the shop or replaced every time that the operating system is brought up to date, or that a security patch is available. And of course, they facilitate the use of apps and the development of ecosystems. Now, the automobile, which until now has more or less remained the same during its long life cycle, is about to become much more dynamic.
Macquarie taps Barclays BCS -4.34% IT Executive as CIO. Justin Raoul Moffitt, an 18-year IT veteran with Barclays, steps in as CIO at Macquarie starting in February 2016, a company spokesman said.
Verizon Communications Inc. VZ (U.S.: NYSE) | Sprint Corp. S (U.S.: NYSE) | |||||||||||
Time | close | S&P 500 | Time | Close | S&P 500 | |||||||
NOV | 16 | 4:03PM EST | 45.04 | 1.49 | 16 | 4:00PM EST. | 4.21 | 1.49 | ||||
17 | 4:00 | 45.08 | -0.13% | 17 | 4:03 | 4.4 | -0.13% | |||||
18 | 4:05 | 45.38 | 1.62% | 18 | 4:00 | 3.99 | 1.62% | |||||
19 | 4:00 | 45.76 | -0.11% | 19 | 4:00 | 4.05 | -0.11% | |||||
20 | 4:00 | 45.39 | 0.38 | 20 | 4:00 | 3.83 | 0.38 | |||||
21 | 21 |
In March 2015 the management team of Londonderry Air (LA) met to discuss a proposal to purchase five short haul aircraft at a total cost of $25 million. There was general enthusiasm for the investment, and the new aircraft were expected to generate an annual cash flow of $4 million for 20 years.
The focus of the meeting was on how to finance the purchase. LA had $20 million in cash and marketable securities (see table), but Ed Johnson, the chief financial officer, pointed out that the company needed at least $10 million in cash to meet normal outflow and as a contingency reserve. This meant that there would be a cash deficiency of $15 million, which the firm would need to cover either by the sale of common stock or by additional borrowing. While admitting that the arguments were finely balanced, Mr. Johnson recommended an issue of stock. He pointed out that the airline industry was subject to wide swings in profits and the firm should be careful to avoid the risk of excessive borrowing. He estimated that in market value terms the long-term debt ratio was about 59% and that a further debt issue would raise the ratio to 62%.
Mr. Johnson's only doubt about making a stock issue was that investors might jump to the conclusion that management believed the stock was overpriced, in which case the announcement might prompt an unjustified selloff by investors. He stressed therefore that the company needed to explain carefully the reasons for the issue. Also, he suggested that demand for the issue would be enhanced if at the same time LA increased its dividend payment. This would provide a tangible indication of management's confidence in the future.
These arguments cut little ice with LA's chief executive. "Ed," she said, "I know that you're the expert on all this, but everything you say flies in the face of common sense. Why should we want to sell more equity when our stock has fallen over the past year by nearly a fifth? Our stock is currently offering a dividend yield of 6.5%, which makes equity an expensive source of capital. Increasing the dividend would simply make it more expensive. What's more, I don't see the point of paying out more money to the stockholders at the same time that we are asking them for cash. If we hike the dividend, we will need to increase the amount of the stock issue; so we will just be paying the higher dividend out of the shareholders' own pockets. You're also ignoring the question of dilution. Our equity currently has a book value of $12 a share; it's not playing fair by our existing shareholders if we now issue stock for around $10 a share.
"Look at the alternative. We can borrow today at 6%. We get a tax break on the interest, so the after-tax cost of borrowing is .65*6 = 3.9%. That's about half the cost of equity. We expect to earn a return of 15% on these new aircraft. If we can raise money at 3.9% and invest it at 15%, that's a good deal in my book.
"You finance guys are always talking about risk, but as long as we don't go bankrupt, borrowing doesn't add any risk at all. In any case my calculations show that the debt ratio is only 45%, which doesn't sound excessive to me.
"Ed, I don't want to push my views on this after all, you're the expert. We don't need to make a firm recommendation to the board until next month. In the meantime, why don't you get one of your new business graduates to look at the whole issue of how we should finance the deal and what return we need to earn on these planes?"
Evaluate Mr. Johnson's arguments about the stock issue and dividend payment as well as the reply of LA's chief executive. Who is correct? What is the required rate of return on the new planes?
Balance sheet | |||
bank Debt | 50 | cash | 20 |
other current liabilities | 20 | other current assets | 20 |
10% bond, due 2032* | 100 | Fixed assets | 250 |
Stockholders' equity** | 120 | ||
Total liabilities | 290 | Total Assets | 290 |
Income statement | |||
Gross Profit | $57.5 | ||
Depreciation | 20.0 | ||
Interest | 7.5 | ||
Pretax profit | 30.0 | ||
Tax | 10.5 | ||
Net profit | 19.5 | ||
Dividend | 6.5 | ||
*the yield to maturity on LA debt is currently 6%
**LA has 10 million shares outstanding, with a market price of $10 a share. LA's equity beta s estimated at 1.25, the market risk premium is 8%, and the Treasury bill rate is 3%