Introduction
Company evaluation theories are increasingly becoming powerful tools in determining the worth of companies (Tobin 1969). Often, information on stock shares is usually packaged with data on parameters such as price ratios and earnings per share (Viney 2009). Investors would therefore want to invest in areas where they can reap good returns. In the direction of building tools that can help investors in evaluating a company, several models have been designed. Among the most common models that are often used here include the dividends valuation model, the cash flow model, the price book ratio and the price-earnings ratio (Viney 2009).
These four models that have been mentioned above will be utilised in evaluating Goodman Fielder Company. Here, historical data on share returns, market returns, and financial statements will be used to approximate the value of Goodman Fielder shares. The calculated values will then be compared with the actual values of shares in the market. The period of our interest runs from 1st January 2006 to 2nd February 2012.
Background Information
Goodman Fielder is a food processing and retail company with base operations in Australia (Kenneth 1982). Among the products that are produced and marketed by the “Goodman Fielder Company” include bread, mayonnaise, milk, pizzas, cooking oils and pies (Kenneth 1982). The company ranks top among the main producers and distributors of food within Australia and the rest of the Pacific Islands (Keown 2002). In New Zealand, (Goodman Fielder) is the largest supplier of flour and commercial fat to manufacturing industries (Oliver 2009).
Thus, apart from being a major producer and distributor of grocery commodities, Goodman Fielder is also a supplier of edible fat and flour to commercial food companies (Ross & Sergio 2005). Many Australians love Goodman Fielder products; thus, the company has a good market segment here (Keown 2002). Goodman Fielder company employs more than seven thousand people within Australia and the larger pacific Islands region (New Zealand, Papua Guinea, New Caledonia and Fiji) (Oliver 2009).
Market Segment
As we have seen, Goodman Fielder has a large and wide market segment. Geographically, Goodman Fielder’s market segment cuts across Australia and the Pacific Islands region (Collins & Kothari 1989). Goodman Fielder produces a variety of products that target various segments in the consumer market (Kopcke 1982). Among the most important segments here include baking, dairy market, fats and oils, and flour (Collins & Kothari 1989).
All of the mentioned segments fall within two major categories (Cuthbertson & Nitzsche 2008). The first category can be described as one that consists of processed items that are ready for consumption such as packaged milk, bread and pies (Oliver 2009). On the other hand, the second category consists of items that need further processing before they can be supplied to local markets (Kopcke 1982). Such items, which are usually supplied to commercial food companies, include bulk flour and edible oils. Goodman Fielder has always been among the two major large scale suppliers of food products in Australia (Cuthbertson & Nitzsche 2008). Likewise, the company is the main supplier of edible oil and flour to commercial companies in New Zealand (Oliver 2009).
Financial History
Although the financial performance of Goodman Fielder has averagely been good for a long time (Rayburn 1986) (where the company has been giving good returns on its equity), the same cannot be said about its performance in the past five years (where our analysis of the company will focus) (Ali et al. 1995). The past five years have not been good for Goodman Fielder Company (Cuthbertson & Nitzsche 2008). During this period, its (Goodman Fielder) profits have been decreasing steadily (Collins & Kothari 1989). The share prices of Goodman Fielder have likewise been on a downward spiral (Cuthbertson & Nitzsche 2008). Below is a chart showing the performance of Goodman Fielder’s shares over the past six years (Reilly & Brown 2012).
As it can be seen above, the shares of Goodman Fielder have decreased by more than a half within the past six years (Ali et al 1995). Some stock market analysts are even expecting Goodman Fielder shares to even fall further in the coming months. While Goodman Fielder products remain popular within its consumer market, the company has been performing dismally (Ali et al. 1995).
An evaluation of Goodman Fielder financial statements over the past six years reveals a steady decline in revenues (Ali et al. 1995). Several factors have helped to contribute towards the dismal performance of Goodman Fielder (Easton 1989). First, the recent years of the global economic crisis created a difficult environment for Goodman Fielder Company (Jorgenson 1968). The sales of Goodman Fielder products decreased as the market adjusted to the economic crisis to seek cheaper food products from other producers (Atrill et al. 2006). Besides, many micro-scale competitors have emerged; thus, eating into the market segment of Goodman Fielder (Jorgenson 1968).
The exports of Goodman Fielder have also been affected by the relative strengthening of the Australian dollar concerning export markets (Kenneth 1982). Moreover, new investments in a bakery by the company (Goodman Fielder) have failed to improve on returns (Atrill et al. 2006). The ever increasing fuel prices on the global market have coupled with other factors (such as increases in wage bills) to contribute to increasing production and operation costs for Goodman Fielder (Atrill et al. 2006). Such a direction has eaten into Goodman Fielder revenues; thus, contributing to its dismal performance (Easton 1989).
More importantly, however, the management of Goodman Fielder has been slow in reacting to the ever dynamic business environment of their company; thus, leading to the poor fortunes of their company (Edwards & Bell 1961). While a large number of customers in Australia and the greater pacific Island region love Goodman Fielder products, the company has failed to solidify its market segment here (Atrill et al 2006). The poor performance of Goodman Fielder shares in the stock market is an indication that share investors are losing their confidence in the ability of its managers (Kenneth 1982).
Unlike a number of her counterparts that have successfully emerged from the recent economic crisis (After shrinking during the global economic crisis, the Australian economy has been recording some growths from 2008) to expand their profits, Goodman Fielder is even performing worse at the moment than during the economic crisis period (Ross & Sergio 2005). Several objectives that have often been designed by Goodman fielder management to tackle the economic difficulties facing their company have so far failed to be fruitful (Atrill et al. 2006). The 2011 half-year results indicate one of the poorest performing periods for Goodman Fielder in the past six years (The general performance of Goodman Fielder has generally been on a steady decline over the past five years) (Kenneth 1982).
In the recent past, Goodman Fielder has at times been unable to pay dividends as a result of its decreasing cash inflows (Miller & Modigliani). There is an urgent need for Goodman Fielder to restructure and adapt to the current economic environment in its market (Koller et al. 2005). Such a direction can only be achieved by a creative, innovative, and new management at Goodman Fielder (Edwards & Bell 1961).
As it will become clear in our analysis, the general performance of Goodman fielder has been way below her peer companies (Baker & Powell 1999). Even with the current progressive growth of the Australian economy (after a difficult economic crisis period), the performance of Goodman Fielder has failed to mirror the expanding Australian GDP (Expected to grow by about 0.8 per cent this year) (Edwards & Bell 1961). However, the outlook of Goodman and the fielder cannot be concluded to be grim (Kopcke 1982). Let us not forget that there are millions of customers that love Goodman Fielder products (Fama & French 2001).
Much of Goodman Fielder’s future will however depend on the ability of its senior management to return the company where it was in the past decade (Miller & Modigliani). With the expanding Australian economy, the possibilities of Goodman Fielder to expand its market share here are real (Baker & Powell 1999). Moreover, the economies of Pacific Island economies such as New Zealand, where Goodman Fielder has a vast interest, have also continued to show progressive growth; thus, presenting new opportunities for Goodman Fielder to expand its markets in these areas too (Fama & French 2001).
However, as we had seen earlier, the onset of positive fortunes for Goodman Fielder is dependent on the ability of its management to deal with current difficulties and exploit existing opportunities in the market (Baker & Powell 1999).
Return on Equity
Return on Equity is among the most important approaches that are usually utilised by investors to analyze a company’s profitability. Here, we will utilise the most recent returns (Half-year returns for the period ending December 2011) data from Goodman Fielder Company to analyse its return on equity. Generally, a company that can produce high returns from its equities without accumulating large debts boasts of large cash flows (Baker & Powell 1999). Thus, such companies can grow without new capital expenditures. Such an arrangement is useful for investors since they can withdraw funds from such a company and invest their withdrawals in other interests (Fama & French 2001).
To understand important components on equity returns, we will employ the use of the Du Pont Model in analysing the equity returns of Goodman Fielder Company (for the period mentioned) (Beneda 2003). To give investors information on specific areas of interest, the Du Pont model has divided equity returns into three multiples: Net profit margin, asset turnover, and Gearing Ratio (Kopcke 1982).
Thus:
Return on Equity = Net Profit margin*Asset Turnover* Gearing
From the Goodman Fielder half year returns ending 31st December 2011:
Net Profit Margin = Net Profits/Revenue = 21.5/1288.0 = 0.0167
Asset Turnover = Revenue/ Assets = 1288.0/1542.8 =0.4493= 0.835
Gearing Ratio = 2.58
Therefore, Return on Equity = 0.0167*0.835*2.58 =0.036 or 3.6%
An equity return of 3.6% is quite low (Fazzari et al. 1988). Such a rate is way below the acceptable average of about 12%. With such rates, investors will thus shy away from buying Goodman Fielder shares at the stock exchange; thus, low demand for the company shares at the stock market (Beneda 2003). Such a direction explains why the stock prices of Goodman Fielder have been falling steadily at the stock market (Fazzari et al. 1988).
As it has been calculated above, Goodman Fielder had a profit margin of 1.67 per cent (during the period of examination). Again, such a profit margin is quite low (Kopcke 1982). It, therefore, means that the company is making little profits from its revenues (Miller & Modigliani). Besides, such a low-profit margin is also an indication that there is currently a low possibility that the company’s (Goodman Fielder) management will affect profits to down spiral further (Beneda 2003). Since the profit margin is approaching one percentage point, a further decrease in profit margins is unlikely to result from the mismanagement of Goodman Fielder (Fazzari et al. 1988). It is therefore safer to invest in Goodman Fielder shares with a disregard of how the company’s management could lead to future decreases in profits (Lehn & Makhija 1996). However, such a consideration cannot be used in isolation when identifying the potential of Goodman Fielder shares (Beneda 2003).
During the half-year period ending 31st December 2011, Goodman Fielder recorded an asset turnover of 83.5%. The asset turnover ratio helps determine the capacity of a company in converting its assets to income (Black 1972). An efficiency of 83.5 % in converting assets to profits is quite acceptable (Fazzari et al. 1988). What however is of concern to investors is the low return on equity despite leverage of 2.58 (Ohslen 1995). Such an arrangement means that Goodman fielder is relying on debts to generate its low return on equity at 3.6% (Fruhan 1981). Without debts, Goodman fielder would generate a return on equity of only 1.4%. Such an arrangement means that there is a low cash flow within Goodman Fielder; hence, explaining why the company has been facing difficulties in performance (Black 1972).
Estimation of Goodman Fielder Shares
CAPM Model
The CAPM (Capital Pricing Model) model has for many years been a useful tool in calculating expected returns from shares (Lehn & Makhija 1996). Although several economists have criticised the effectiveness of the CAPM model in analysing share returns, no alternative model has been developed to date (Black 1972). Generally, the CAPM model can be represented in the equation below:
C= A+ β (B-A)
Where A is the risk-free rate, B is the market return rate, β is the coefficient of the premium rate, and C is the expected rate of return (Ohslen 1995).
Our important responsibility lies in calculating beta for the capital pricing model (Black 1972). By observing the above equation, one can be able to observe that it is an equation of a straight line with a constant gradient and an intercept (Ohslen 1995). One can therefore be able to determine beta through the use of an appropriate graph that plots C against (B-A) (Fruhan 1981). Having obtained the historical share return indexes from the dates 1st January 2006 to 2nd February 2012, we calculated the monthly share return rates in an excel worksheet (Gozzi et al. 2006). Such rates were obtained by calculating percentage changes in the share returns of adjacent months and then multiplying the result by 12 to obtain the annual rates of returns (Lehn & Makhija 1996).
Likewise, a similar procedure was employed to calculate the expected monthly returns of the share market from a dataset that contained monthly return values of shares (from dates 1st January 2006 to 2nd February 2012) (Bond & Meghir 1994). The free market rates were obtained from the 20 year Federal Reserve rates (from the historical data of the United States treasury rates) (Gozzi et al. 2006). As we have been using in other data sets, our period of interest here is from 1st January 2006 to 2nd February 2012. The frequency of the treasury rates that we used is monthly.
The premium rate was then obtained by subtracting A from B (Lintner 1965). An appropriate graph was then drawn in excel where the rate of share returns was plotted against the premium rates (Lintner 1965). Our raw Beta is thus the coefficient of the premium rate, which was shown to be 0.9691.
As it is usually suggested, our raw beta needs to be adjusted as below:
0.9691 (0.67) + 0.33 =0.979
Thus, we obtain an adjusted value of 0.979 as our new beta (Lintner 1965).
In analysing the CAMP model, we used treasury rates from the US Federal Reserve bank to proxy free-market rates (Gozzi et al. 2006). Such a direction was informed by the stability of the treasury rates and the very unlikely scenario of a default from the United States government (Bond & Meghir 1994). Moreover, it was not difficult to obtain the publicly available data of historical treasury rates from the US Federal Reserve bank (Green et al. 1996). Many economists are confident in using the US treasury rates to represent free-market rates (Liynat & Zarwin 1990). Such rates are often approximated at 5 %( Liynat & Zarwin 1990). However, it is useful to observe that in exceptional circumstances, treasury rates can decline (Liynat & Zarwin 1990). Such a direction was observed during the recent economic crisis, and also during the early months of 2012. Here, treasury rates went even below 3% during some months.
On the other hand, we employed the return value of the stock market to proxy the market return rate (Green et al. 1996). Since such a value is a representation of the average performance in market stocks, it may not represent a true picture of the market return rate (Green et al. 1996). Here, it would be useful to obtain the standard deviation on stock performance to understand whether the estimation that we have used is useful in representing market returns (Bond & Meghir 1994). However, since such an approach would involve a cumbersome procedure of evaluating the performance of all listed companies in the share market, we simply used the total value of stock returns to calculate our assumed market return rate (Liynat & Zarwin 1990).
With an adjusted Beta, we calculated the current risk premium rate as follows. With a beta of 0.979, taking the current treasury rate (2.75% as obtained from the historical treasury rates), and assuming an average free-market return of 5% (since most economists estimate that the premium rate varies from 3.5% to 6%, we take an average of 5%), the risk premium rate can be calculated as:
A= 0.05+ 0.979 (0.05) = 9.9%
The Dividend valuation Model can be represented as follows:
Value= Expected Dividend/ (Return on equity-Growth rate)
The discount rate is thus 9.9% and the last dividend payout was 2.5 cents per share (Liynat & Zarwin 1990).
We estimate a growth rate of 2%. As we had seen earlier during equity returns analysis, the ratio of profit margin was approaching 1%. Such a scenario implies that the management of Goodman Fielder will in future have a slight impact on future profit declines (Bond & Meghir 1994). Since share prices have also declined to the lowest levels, we can expect the share prices to stabilize and grow at a stabilized rate of 2% (Lone et al. 1996). We do not expect the shares to grow at a higher rate since the company (Goodman Fielder) will require a longer period to recover (Bowen et al. 1986).
Thus:
Value = 0.025(1+0.02/2)/ (0.099/2-0.02/2)= 0.6328 A$
The Value of Goodman Fielder share is thus 63.28 Cents. This particular value is comparable with the market value that has been ranging from 80 cents to 40 cents in 2011.
We can also calculate the implied growth rate by assuming that the stock prices for Goodman and Fielder are correctly valued (Lone et al. 1996). Here, with the greatly unstable Goodman Fielder stocks, the challenge would be in picking a historical value of the stock (Lone et al. 1996). We can select the sock value on 1st January 2012 (Green et al. 1996). On this particular date, the stock was traded at 42.42 cents. Thus:
0.4242 = 0.025 (1+g/2)/ (0.099/2-g/2)
Thus, implied growth rate is 0.019.
Cash Flow
Since Goodman Fielder does not always pay dividends, we can use cash flows per share (instead of dividends) to estimate its share value (Head 2008). According to the half-year financial statement for the year ending 31st December 2011, Goodman and fielder had a net cash flow of 137.1 Million dollars. The cash flow per share would thus be equivalent to 7.262 cents
Thus:
Value = 0.07262 (1+0.02/2)/ (0.099/2-0.02/2)= 1.83 A$
The value above is much higher than the share prices at the stock market.
Price Earning Ratio and Price Book Value model
Price earning ratio= Share market Price/ Earnings per share
For the year ending 31st December 2010, the earning per share for Goodman Fielder was 9.7 Cents. On this particular date, the company’s shares were trading at 89.65 Cents. Thus, the earning ratio was 9.2.
It is important to note that with the presence of many dynamics at Goodman fielder, the earning ratio has been changing constantly (Bowen et al. 1986).
Likewise, Price book ratio = Equity market value/ Equity book value
Using the half-year financial statement for the year ending 31st December 2011, the price-book ratio is 1.33
Discussion
As we had seen, one of the main challenges that one is likely to face while evaluating a company like Goodman Fielder is the presence of many dynamics at play here (Head 2008). For example, data on stock returns for the past six years indicates a gradual dip in stock prices, which change continuously (Bowen et al. 1986). During our earlier analysis, we were able to observe a pattern of struggle and poor performance at Goodman Fielder.
Generally, the overall trend of stock returns has been on a downward trend (Peasnell 1981). Although several catalytic activities have once in a while helped to stimulate the share prices to rise slightly, the general direction of the stock prices has been a dip (Head 2008). For example, on 6th January 2012, the stock prices for Goodman fielder rose by a third following a 10 per cent acquisition of the company’s stake by Wilmer international limited. However, this particular rise of stocks was short-lived as share prices fell again after some time (Bowen et al. 1986).
From our CAMP model, we were able to obtain a raw beta value of 0.969. Such a value (below unity) indicates that stock returns from Goodman fielder are performing below the average performance of the stock market (Peasnell 1981). With such a trend, the Goodman Fielder shares have decreased their competitiveness in the stock market: hence, the observed dipping prices (Head 2008).
The root means square that was calculated by Excel’s regression was 0.19. As a result, about 19% of the risks that can be associated with Goodman Fielder are systematic (Peasnell 1981). Such Risks are related to trading activities at the stock market (Hitchner 2006). On the other hand, 81 per cent of the risks that can be associated with Goodman Fielder are non-systematic (Rappaport 1981). Such risks can be associated with the management of Goodman Fielder.
With a strong market segment of customers in Australia and the greater Pacific Islands region, much will be needed from the management at Goodman Fielder to stabilize the company (Hitchner 2006). With the Australian economy’s recovery from the recent economic crisis, the company’s management should fight to retain and expand the share of their market segment (Rappaport 1981).
From an analysis of the DDM model, we were able to obtain a stock price of 63.28 Cents (Chitou & Ketz 1991). Such a value is comparable with the present value of the company’s stock at the share market (Hitchner 2006). However, it is still difficult to determine the accuracy of such a calculated value due to the volatile prices of the company’s share prices, which change constantly at the share market (Rappaport 1981). Still, the calculated value can hold for the period under which we evaluated the company (January 2006 to March 2012).
On the other hand, our calculated value from cash flows was quite higher than the average share prices of Goodman Fielder (Chitou & Ketz 1991). A possible explanation for such an arrangement is the usual handling of large cash flows in companies that deal with perishables such as Goodman Fielder (Hitchner 2006). There is also a possibility of having taken wrong assumptions in our calculations, and, or errors in our computation (Jorgenson 1968).
Due to a continual decrease in its share prices, the shares of Goodman Fielder could also be undervalued at the moment (Chitou & Ketz 1991). In the last six years, the share prices of the (Goodman Fielder) company have decreased by over 50%. The management of Goodman fielder needs to develop innovative solutions that would steer their company back to the years of high profitability and high share capitalization (Rayburn 1986).
Our calculated value for the price-earnings ratio was 9.2. Such a value could indicate the high potential of growth for Goodman Fielder (Chitou & Ketz 1991). The 9.2 price ratio could also mean that there is currently a low risk of return at Goodman Fielder Company (Jorgenson 1968). Finally, a 9.2 price ratio could indicate a small proportion of re-investment at the Goodman Fielder company (Collins & Kothari 1989). The calculated price ratio was 1.33. Such a value is below the average market value (Sainsbury 2010).
Again, it is important to note that our understanding of the company from the models that have been evaluated above is limited (Scott 1992). Since such an evaluation is dependent on the usually speculative share market, we cannot depend on the company’s volatile share prices to arrive at our conclusions (Sainsbury 2010). Although many investors will use some of the methodologies that we have employed above to evaluate the potential of companies, their overall investments are usually based on speculation (Scott 1992).
Still, since the performance of a company’s share price is a proxy to the financial performance of a company, it can give us important information in evaluating a company (Sharpe 1964). The problem with shares like those of Goodman is that since they have been changing very gradually, it is difficult to associate specific share prices with the company’s performance (Sharpe 1964). The observed overall trend however has been a general decline in the price of the shares (Siegel 1985).
Although the Dividends model approach has been useful in helping us to approximate a seemingly accurate value of Goodman fielder’s share price (based on comparison with other share prices), the cash flow system is a more accurate method of determining a company’s share value (Sainsbury 2010). With a poor performance record that has recently streamed from the company (Goodman Fielder), the seemingly high price of shares that was approximated by the cash flow model indicates that the company is currently undervalued at the stock Market (Stewart 1991). In the direction of increasing its market share value, Goodman Fielder company needs to convince investors of its worth (Stiglz & Weiss 1981). Robust and creative management will especially help in achieving such a goal (Stiglz & Weiss 1981).
Conclusion
During the past six years, the financial performance of Goodman Fielder has declined steadily. Such a direction has seen the company’s share value drop over the same period. While we obtained a yield from the dividends model that approximated the current value of shares at the stock market, the more accurate cash flows model yielded a value that was at least thrice the current share price. Since most stock investors like earning dividends, the stock market can thus value shares based on dividend payouts (Strong & Walker 1993). Such a direction can explain the seemingly accurate value that was obtained from the dividend’s evaluation model.
However, dividends can at times be misleading on the true value of a company’s share price. After paying a dividend of five cents, Goodman Fielder Company was able to pay only half of that amount in the last financial year. Therefore, as it was implied by the cash flow model, the share prices of Goodman Fielder are thus undervalued at the moment (Strong & Walker 1993).
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