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BA 531 Advanced Financial Management
Part One – Risk and Return
Snyder's-Lance, Inc. (LANCE)
Snyder's-Lance, Inc. (LANCE) was formerly known as Lance, Inc. up until 2010. Snyder's-Lance, Inc. (LANCE) was founded in 1912 and headquarters is located in Charlotte, North Carolina. Currently, they manufactures, distributes, markets, and sells snack food products such as, pretzels, sandwich crackers, kettle chips, pretzel crackers, cookies, potato chips, tortilla chips, other salty snacks, sugar wafers, nuts, and many more!Snyder’s-Lance, Inc. sells its products through direct-store-delivery network, distributors, and direct sales to grocery/mass merchandisers, club stores, discount stores, convenience stores, and food service establishments, as well as various other retailers in throughout the United States.
What betas did you calculate using the various indices?
A five year monthly regression was used to calculate the beta’s (b)for LANCEand four indices including the S&P 500, NYSE Composite, NASDAQ Composite, and the Russell 1000. The results are illustrated in Figure 1 below.
Figure 1 / Snyder's-Lance, Inc. (LANCE) Index Beta’s (b)Index / LANCEBeta (b)
S&P 500 / 0.96
NYSE Composite / 0.85
NASDAQ Composite / 0.75
Russell 1000 / 0.94
Why are they different?
As shown in Figure 1, there is variation in betas between the indices. These differences can be caused by the structure of the index. As an example, the S&P 500 measures 500 large-cap U.S. stocks and is value weighted which gives the largest companies the greatest influence.The NASDAQ Composite measures all common stocks listed on the NASDAQ that includes more than 3200 companies, but has a high concentration of technology stocks so it is more sensitive to that industry than other sectors. The NYSE Composite measures performance of large, mid and small cap stocks and is weighted using free-float market capitalization and calculated on both price and a total return basis. Other factors creating differences in betas across services is that there is more than one way to calculate beta, the historical time period used, the return intervals used, and the adjustments made to regression betas.
Which index do you feel is most appropriate to use when calculating beta for stocks you are considering?
Although the S&P 500 has a broad range of companies from various sectors and industry groups and is considered the best representation of the market, it tracks large cap companies of whichSnyder's-Lance, Inc. (LANCE) is not; therefore, I believe the NYSE Composite is more appropriate. The NYSE Composite Index covers price movements of common stock of some 2300 companies listed on the NYSE. Due to its breadth and tracking of small cap companies as well as mid and large cap, I believe it is a better indicator of market performance and measurement than the S&P. Lastly, due to the tech-weighted NASDAQ Composite, I would not choose it as an appropriate measure.
How do your beta calculations compare with those of the published sources?
The beta calculation with Yahoo Finance is 0.78 compared to the S&P 500 Composite which is 0.96.This difference is most likely due to the historical time period (60 months vs. 36 months). From the NASDAQ’s website, for firms in the NASDAQ Composite Index, reports LANCE’s beta as 0.75.They calculate beta by using the movement of the stock's price each week relative to the movement of the S&P 500. They use between 36-60 monthsof observations to derive beta values. The difference in betas is due to due to the different return intervals and historical time period.
Comparing your company to the NASDAQ index, which has higher:
(a)Total risk?
NASDAQ’s monthly standard deviation is 4.49% vs. LANCE’s monthly standard deviation of 8.10%. With standard deviation being a measure of risk, LANCE has higher total risk than NASDAQ due to the lack of diversification.
(b)Risk per unit of return?
The coefficient of variation (CV) for the NASDAQ index and LANCEare shown in Figure 2. CV is useful as it measures stand-alone risk for two different investments that have different returns. The values in Figure 2 show that LANCE is riskier than the NASDAQ Composite when evaluating for risk per unit of return.
Figure 2 / Coefficient of Variation (CV)LANCE / NASDAQ Composite
886.10% / 321.10%
(c)Systematic risk?
Systematic risk aka “un-diversifiable risk” or “market risk” is defined as the risk inherent to the entire market or entire market segment (
A recession or wars are some causes of systematic risk. With systematic risk, it impacts the market in total and is inescapable through diversification. The market risk of a stock is quantified by its beta (b). A beta equal to 1.0 is determined to be as risky as the market. Beta >1, indicates the stock is more risky than the market and a beta <1 is less risky. In Figure 3, the beta coefficients for LANCEand the NASDAQ. The beta of the NASDAQ was bigger than the LANCE. Both of these betas were computed using the S&P 500 as a proxy for the Market Portfolio.
Figure 3 / Beta Coefficients (b)LANCE / NASDAQ Composite
0.96 / 1.12
These beta coefficients indicate that both the NASDAQ Composite and LANCE are less risky than the market.
Does your company have a higher expected return than the overall stock market? Why?
Historical data of averages from the last 60 months are displayed in Figure 4 forLANCE, NYSE Composite, NASDAQ Composite, and the S&P 500.
Figure 4 / Expected ReturnsLANCE / NYSE Composite / NASDAQ Composite / S&P 500
0.91% / 0.88% / 1.40% / 1.13%
In comparing these values, LANCE has a lowerfive-year historical return than the NASDAQ Composite This below market performance is most likely due to factors that are unique to LANCE. However, in my readings, I did not find any specific fact or factors to justify the lower return. The high performance of the NASDAQ is due to the high return on the technology stocks that dominate the NASDAQ. One could argue, see the paragraph below, that LANCE had a lower return due to lower systematic risk, as measured by beta.
An alternate method of determining higher expected return would be to examine the systematic risk/beta ofLANCE versus the market. If markets are efficient, then securities with betas greater than one have higher expected/required returns when compared to the market portfolio. Since LANCE has a beta of 0.78, then the LANCE expected return is lowerthan the market portfolio.
Part Two – Financial Analysis
A five year trend analysis was created utilizing data from theLANCE balance sheet and income statement and is shown below.
LANCE Trend Analysis Selected Accounts($ Millions)
Balance Sheet / Year 2013 / % Change / Year 2012 / % Change / Year 2011 / % Change / Year 2010 / % Change / Year 2009 / % Change
Current Assets / 336.266 / 4.8 / 320.733 / -17.3 / 388.028 / 19.8 / 323.767 / 81 / 178.882 / 26.8
Current Liab. / 146.204 / -5.4 / 154.623 / -0.3 / 155.146 / -19.7 / 193.269 / 100.6 / 96.366 / 5.2
Other Assets / 1,428.33 / 0.2 / 1,426.00 / 32.2 / 1,078.76 / -5.3 / 1,138.59 / 218.6 / 357.409 / 9.9
Total Liab. / 846.694 / -3.2 / 874.557 / 39.2 / 628.199 / 0.4 / 625.741 / 139.2 / 261.604 / 13.4
Share. Equity / 918.73 / 5.7 / 869.504 / 4 / 836.111 / 0.4 / 832.588 / 203.1 / 274.687 / 16.6
Income State. / Year 2013 / % Change / Year 2012 / % Change / Year 2011 / % Change / Year 2010 / % Change / Year 2009 / % Change
Sales / 1,761.05 / 8.8 / 1,618.63 / -1 / 1,635.04 / 66.5 / 981.835 / 6.9 / 918.163 / 7.7
Cost of Goods / 1,103.33 / 8 / 1,021.48 / 0.7 / 1,014.67 / 82 / 557.415 / 8.7 / 512.78 / 2.7
Net Income / 78.72 / 33.2 / 59.085 / 54.4 / 38.258 / 1,423.00 / 2.512 / -93 / 35.794 / 102.2
Key Metrics
LANCE / Year 2013 / % Change 1 / Year 2012 / % Change 2 / Year 2011 / % Change 3 / Year 2010 / % Change 4 / Year 2009 / % Change 5
LANCE / Industry / LANCE / Industry / LANCE / Industry / LANCE / Industry / LANCE / Industry
Current Ratio / 2.3 / 2.3 / 2.07 / 2.07 / 2.5 / 2.5 / 1.68 / 1.68 / 1.86 / 1.86
EPS from Basic Operations / 1.07 / 1.07 / 0.97 / 0.97 / 0.71 / 0.71 / 1.1 / 1.1 / 1.22 / 1.22
In the Balance Sheet, after 2009, one can see that Current Assets were in the $300-400 million range. Current Liabilities, after 2009, were in the $150-190 million range. LANCE made a large acquisition in 2009 and 2011-2012. The 2011-2012 acquisition’s impact is reflected in the large increases in both Other Assets and Long Term Debt. Strangely, the 2011 acquisition seemed to have no real impact on Current Assets or Current Liabilities. Increases in Shareholder’s Equity, after 2009, reflects the firm’s ongoing profitability.
On the income statement, I choose to complete a ratio analysis rather than a trend analysis based on the income statement. The impact of the 2010 acquisition is obvious. Between 2010 and 2012, the firm’s revenues increased by 65%. Comparing 2009 profits to 2012 profits, profits increased by 52%. I did not use 2010 profits for my analysis, as the decline to about 2 million in profits was clearly an anomaly. In reviewing key trends, except in years of large acquisitions, the firm appears to be in a profitable, predictable, and stable business. The acquisitions that the firm has completed have clearly increased firm revenues and profits.
HERE IS THE BEGINNING OF AN OPTIONAL SECTION. BA 531 STUDENTS ARE NOT REQUIRED TO COMPLETE A RATIO ANALYSSIS FOR THEIR COMPPANY. IN THIS SECTION, YOU ARE ONLY REQUIRED TO ANALAYSE TRENDS IN THE INCOME STATEMENT, BALANCE SHEET (above), AND STATEMENT OF CASH FLOWS (below the ratio analysis). IF YOU PLAN ON USING THIS REPORT AS PART OF YOUR PORTFOLIO, I SUGGEST COMPLETING THE RATIO ANALYSIS.
The line graph below was constructed to highlight Leverage Ratios for LANCEduring Y09 to Y13.The debt-to-equity ratios for LANCEwere consistently equal toindustry averages. This is the only company left in the industry and we cannot do a competitive analysis.
Leverage Ratios: Debt to Equity
The times interest earned (TIE) ratio measures how far operating income can decline before LANCE is unable to meet its annual interest costs. In the last 5 years, LANCE’s TIE has steadily declined. Y09 was at the highest out of all 5 years. In Y10 and Y11 however the TIE steadily trended downwards which was most likely due to a recession. In Y12, you can see that it slowly moved up however Y 13 the TIE went back down.
Leverage Ratios: Times Interest Earned
The Liquidity Ratio graph below highlights LANCE’s current ratiosand cash flow per share along with the industry averages. Liquidity ratios measure a company’s ability to pay their short term debt obligations.
Liquidity Ratio: Current Ratio
Beginning with the current ratio aka liquidity ratio, which is a measure of short term solvency, LANCE’s current ratio has been equal to the industry average and further, it does not show wide fluctuations. This indicates that LANCE’s assets could be converted to cash quickly to cover the claims of short term creditors if needed and that they are in relatively good short term standing. While creditors favor high current ratios, shareholders prefer lower ones.
Cash Flow per Share
The cash flow per share is a measure of a company’s profitability and is calculated by: Cash Flow per Share = (Operating Cash Flow – Preferred Dividends) / Common Shares Outstanding.
This ratio is considered a better measure of financial strength than EPS because cash is difficult to manipulate where EPS can be easily altered to appear positive. LANCE’s cash flow per share was equal to the industry average which again, may be due to the recession. After Y 09, it appears that all of the years decreased dramatically except for Y 13 which shows a steadily movement upward.
Activity Ratio: Operating Cycle Days
Activity Ratio: Fixed Asset Turnover
The Activity Ratio graph above illustrates the Fixed Asset Turnover ratio and the OperatingCycle for LANCE and the industry norms. The Fixed Asset Turnover ratio reflects how effectively a firm generates sales from fixed asset investments, e.g., property, plant and equipment.The ratio is calculated by dividing sales into total assets. LANCE has been equal with industry averages for Y 09-Y13. The Operating Cycle is the length of time between the purchase of inventory and the collection of cash from accounts receivable. A short Operating Cycle indicates the company is collecting receivables efficiently, has good payment terms with businesses that it owes money and is moving inventory with the average production ability and customer demand.
Profitability Ratio: Profit Margin, Return on Average Total Assets,
and Return on Average Total Equity
The Profitability Ratio graph above illustrates the Return on Avg. Total Assets, Return on Average. Total Equity, and Profit Margin for LANCE and the industry. These profitability ratios are intended to measure how effectively a firm uses their assets and manages its operations.
Return on Avg. Total Assets (ROA) is a measure of profit per dollar of assets and can be calculated by dividing net income by the average total assets. Over the last three years LANCE’s ROA has remained equal to the industry.
Return on Avg. Total Equity (ROE) is a true bottom- line measure of performance for shareholders. ROE was low in Y10-12 which a gradual increase in Y 13. LANCEROE was higher (for all 5 years) when compared to ROA and Profit Margin. After Y09, all of the years are still trending downward.
Profit Margin can be determined by dividing a firm’s net income by sales. Obviously high profit margins are desired, but can be very misleading as this is purely an accounting rate of returns and do not take in consideration the whole picture. The profit margins were low for Y10-11 and gradually trended upward in Y12-13.
HERE IS THE END OF THE OPTIONAL SECTION
Statement of Changes / Year 2013 / % Change 1 / Year 2012 / % Change 2 / Year 2011 / % Change3 / Year 2010 / % Change 4 / Year 2009 / % Change 5Operating Activities - Net Cash Flow / 140.736 / 51.7 / 92.768 / -16.8 / 111.528 / 150.9 / 44.444 / -35.8 / 69.277 / 26.2
Investing Activities - Net Cash Flow / -64.911 / 81.4 / -348.344 / -560.7 / -52.721 / -180.2 / 65.72 / 202.9 / -63.883 / 30
Financing Activities - Net Cash Flow / -71.021 / -129.1 / 243.848 / 471 / -65.719 / 25.4 / -88.113 / -6,693.60 / -1.297 / -104.5
Dividends / 44.421 / 1.5 / 43.777 / 2 / 42.918 / -69.9 / 142.458 / 598 / 20.41 / 1.4
SNYDERS-LANCE INC / SELECTED CASH FLOW ACCOUNTS
($ MILLIONS)
13-Dec / 12-Dec / 11-Dec / 10-Dec
INDIRECT OPERATING ACTIVITIES
Income Before Extraordinary Items / 79.084 / 59.51 / 38.741 / 2.531
Depreciation/Amortization / 59.631 / 53.764 / 55.337 / 40.1
Deferred Taxes / 10.36 / -15.279 / 6.026 / 18.228
Accounts Payable / -5.067 / -23.932 / 24.25 / -25.594
Operating Activities - Net Cash Flow / 140.74 / 92.768 / 111.53 / 44.444
INVESTING ACTIVITIES
Sale of Investments / 2.298 / 1.444 / 0.96 / 0
Capital Expenditures / 74.579 / 80.304 / 57.726 / 33.347
Acquisitions / 32.823 / 372.704 / 46.812 / -96.336
Investing Activities - Other / 30.745 / 93.896 / 50.857 / 2.731
Investing Activities - Net Cash Flow / -64.911 / -348.344 / -52.721 / 65.72
FINANCING ACTIVITIES
Cash Dividends / 44.421 / 43.777 / 42.918 / 142.45
Long-Term Debt - Issuance / 0 / 325.211 / 35.098 / 47.762
Long-Term Debt - Reduction / 36.635 / 47.317 / 62.309 / 0
Financing Activities - Net Cash Flow / -71.021 / 243.848 / -65.719 / -88.113
Cash and Equivalents – Change / 4.804 / -11.565 / -7.036 / 22.459
DIRECT OPER. ACTIVITIES
Interest Paid - Net / 15.131 / 10.533 / 11.341 / 6.391
Income Taxes Paid / 39.313 / 33.554 / 2.364 / 12.208
Statement of Cash Flows for LANCE
For operating activities, the primary drivers are Net Income and Depreciation. There was a large increase in operating cash flows in 2011 and 2013. For 2013, this was driven by net increases in income and choosing not to pay off payables. For 2011, this was driven by an increase of payables of 50 million and an increase of depreciation of 15 million.
For investing cash flows, in most years LANCE will spend about 60 million in Capital Expenditures, a use of funds. This was different in 2010 as the company sold where the firm sold a long term asset for 100 million dollar long term asset. There was also a large change in 2012 when the firm made a large acquisition of 370 million.
Cashflows from financing activities have made significant changes in recent years. After 2009, the company doubled dividends from 20 million to 40 million per year. In 2010, the company paid a special dividend of 100 million. In 2012, the company borrowed 325 million to pay the large acquisition. In most years, the firm will both issue and redeem debt, probably for the purpose of lowering the interest rates on debt and rolling over maturity debt.
Please see the chart above.
Part Three – Stock Valuation
To determine the value of LANCE stock, I will apply two models. I will apply the constant growth model and the non-constant growth model. To apply this model, one requires three types of inputs, estimated dividends, growth rates, and required rates of return.
To compute the required rate of return, I am using my beta as computed using the NYSE Composite index. This was the beta that I determined to be the best estimate of beta for LANCE.
Determine the discount rates using the CAPM model.
rRF =3%, RPm = 6.5%, beta (b) = 0.85
rs = rRF + RPm*beta = 3% + 6.5%*0.85 = 8.07 =8.1%
Next, I must determine the long run growth rates for my company. To do this I used analyst’s earnings forecasts from a reputable sourceto determine expected growth rates for earnings. My first choice was finance.yahoo.com, but I also checked Zacks and a stock report available from my discount broker.
In this situation, the forecasted five year growth estimates, past and next, figures are 5.95% and 12.80% respectively. I do not believe that the projected growth rate of 12.80% is realistic. Thus for my valuation, I am using the 5.95% as my estimate of the firm’s long run growth rate.
►Yahoo
Use Constant growth model to determine stock valuation:
►Dividend for LANCE from Yahoo
The third input was the dividend. I chose the most recent 12 months of dividends as my D0. Thus D0 was $.78. Applying the constant growth model yield a valuation of:
P0 = (D0(1+g))/ (rs – g) =(.64(1+5.95%)) / (8.1% -5.95%) = $34.00
As of the market close the stock price was $26.33 and I computed value of $34.00. Therefore, stock is undervalued.
Supernormal growth model:
►Yahoo
For supernormal growth, I also used inputs available from finance.yahoo.com. I used the “This Year” growth rate of -3.40% as my estimate for year the year 0 to 1 growth rate. I used the “Next Year” growth rate of 12.50% as the year 1 to 2 growth rate. For years after year two, and using the same logic as with the constant growth model, I am assuming the long run growth rate is 5.95%. Thus, here are my inputs:
D1 = $.64 (1-3.4%) = $0.618
D2 = $ .618(1+12.5%) = $0.695
P2 = $.736/ (8.1-5.95)= $34.23
I computed the net present value of 8.1% to find a stock value of $30.46 which indicates that thisundervalued according to this valuation.
As to my confidence in the models, both of my estimates are within about 10% of the current stock price. This implies my required return and growth rates estimates are similar to those being used by current market participants. However, my results were very dependent on the assumed long-run growth rate of 5.95% and the assume beta of .85. Had I used a rate that was 1% higher, the projected stock price would have been about $60. Had my estimated growth been one percent lower, the estimated stock price would have been about $22. There would have been similar shifts in projected price if I had used the yahoo.com beta of .75 would have yielded a stock price of about $36. Overall, while I have some confidence in my results, I would not be willing to risk my money that my estimated prices were correct and that the stock market price was incorrect.
References:
Sample Project. N.p., n.d. Web. 4 October. 2014.
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