Milestone Three Guidelines and Rubric
Overview: For your final project, the CEO has asked you, the new investment manager of XYZ Tech Company, to produce an investment analysis report. You will
prepare an investment analysis report for the company, portfolio analysis template, a complete portfolio, and a justification of your investment strategies in an
executive summary.
For this last milestone, due in Module Seven, you will first complete your portfolio by comparing the risk/return trade-off on the investments you are compiling.
Then, as part of the beginning of your executive summary, you will describe how your investments performed on both an absolute and relative (index or
benchmark) basis. You will also assess investment performance for the securities by calculating the portfolio’s overall investment performance and briefly note
how each security contributed to the portfolio’s performance.
Prompt: First, review your completed portfolio analysis template to access the financial data you gathered for the securities in your investment portfolio.
Forecast each company’s future revenues and earnings growth and analyze the risk and return tradeoff for these investments.
In a 2- to 3-page paper, complete your portfolio by comparing the risk/return trade-off of the investments and then, in beginning your executive summary,
describe how making these investments will position the company to generate an attractive absolute and relative investment performance and assess
investment performance utilizing specific performance measurements.
Specifically, the following critical elements must be addressed:
II.
Portfolio: With your company and market analysis in mind, construct a complete portfolio that includes the following:
D. Compare the risk/return trade-off on the investments. Keep in mind the rates of return for shareholders on the proposed investment portfolio.
III.
Executive Summary: Justify your investment strategies in a summary, utilizing your company and market analysis and portfolio for support. Include the
following in your justification:
A. Describe how making these investments will position the company to generate an attractive absolute and relative investment performance.
Support with examples.
C. Assess investment performance utilizing specific performance measurements.
Support your responses with the data from the portfolio analysis template and other information you have gathered from the financial resources you
have consulted in this course. Be sure to apply instructor feedback on this milestone to your final project.
Rubric
Guidelines for Submission: The written component of this milestone should be submitted as a Word document, 2–3 pages in length (this includes the start
of your executive summary), double-spaced, using 12-point Times New Roman font, one-inch margins, and the latest edition of the APA manual for formatting
and citations.
Please note that the grading rubric for this milestone submission is not identical to that of the final project. The Final Project Rubric will include an additional
“Exemplary” category that provides guidance as to how you can go above and beyond “Proficient” in your final submission.
Critical Elements
Portfolio: Risks/Return
Proficient (100%)
Compares the risk/return trade-off on
the investments
Executive Summary:
Position
Describes how making these
investments will position the company
within its industry in the market,
supported with examples
Executive Summary:
Investment
Performance
Assesses investment performance
utilizing specific performance
measurements
Articulation of
Response
Submission has no major errors related
to citations, grammar, spelling, syntax,
or organization
Needs Improvement (75%)
Compares the risk/return trade-off on
the investments, but comparison is
incomplete or contains inaccuracies
Describes how making these
investments will position the company
within its industry in the market, but
description is cursory, is insufficiently
supported, or contains inaccuracies
Assesses investment performance
utilizing specific performance
measurements, but measurements
used are inappropriate, or assessment
is incomplete or contains inaccuracies
Submission has major errors related to
citations, grammar, spelling, syntax, or
organization that negatively impact
readability and articulation of main
ideas
Not Evident (0%)
Does not compare the risk/return
trade-off on the investments
Value
30
Does not describe how making these
investments will position the company
within its industry in the market
30
Does not utilize performance
measurements to assess investment
performance
30
Submission has critical errors related
to citations, grammar, spelling, syntax,
or organization that prevent
understanding of ideas
10
Total
100%
Apple (AAPL) Stock
2016
2017
2018
Revenues
Cost of Goods Sold
Selling, General & Administrative Expenses
Research and development
Operating Income
Net Interest Expenditure
Pre-Tax Income
Taxes
Net Income
2E+11
1E+11
1E+10
1E+10
6E+10
1E+09
6E+10
2E+10
4E+10
2E+11
2E+11
4E+10
1E+10
3E+10
1E+09
3E+10
8E+09
2E+10
2E+11
2E+11
4E+10
1E+10
3E+10
1E+09
3E+10
9E+09
2E+10
Earnings Per Share
7.8385
Shares Outstanding
5E+09
2019
2020
2021
2.4E+11
1.7E+11
4.1E+10
1E+10
3.2E+10
1.5E+09
3E+10
9E+09
2.1E+10
3E+11
2E+11
4E+10
1E+10
3E+10
1E+09
3E+10
1E+10
2E+10
3E+11
2E+11
4E+10
1E+10
4E+10
1E+09
3E+10
1E+10
2E+10
3.5441
3.6933 3.84845
4.1712
4.3455
5E+09
5E+09 5.5E+09
5E+09
5E+09
Apple (AAPL) Bond
Firm
Debt & Coverage Ratios
Debt/Assets
Debt/Equity
Current Assets/Current Liability
EBITDA/Interest
Debt/EBITDA
Cash Flow Ops/Total Debt
Intrinsic value in 2021
Dividend (2013)
Dividend (2018)
Rate of return (discounted cash flow model)
0.27
0.59
1.35
0.34
1.23
0.76
Ind Avg
0.46
0.40
4.05
-0.67
2.26
0.35
Base
Average Ceiling
$ 24.14 $ 28.97 $ 36.21
1.88
2.52
-1.5118
Caterpillar (CAT) Stock
2016
2017
2018
2019
2020
2021
Revenues
Cost of Goods Sold
Selling, General & Administrative Expenses
Research and development
Operating Income
Net Interest Expenditure
Pre-Tax Income
Taxes
Net Income
4E+10
3E+10
5E+09
2E+09
3E+09
5E+08
2E+09
192000
2E+09
4E+10
3E+10
7E+09
2E+09
5E+09
5E+08
5E+09
1E+09
3E+09
4E+10
3E+10
7E+09
2E+09
5E+09
5E+08
5E+09
1E+09
3E+09
4E+10
3E+10
7E+09
2E+09
6E+09
5E+08
5E+09
2E+09
4E+09
5E+10
3E+10
7E+09
2E+09
6E+09
5E+08
6E+09
2E+09
4E+09
5E+10
3E+10
8E+09
2E+09
6E+09
5E+08
6E+09
2E+09
4E+09
Earnings Per Share
4.2612
5.6369
5.8866
6.1462
6.6863
6.978
Shares Outstanding
6E+08
6E+08
6E+08
6E+08
6E+08
6E+08
Caterpillar (CAT) Bond
Firm
Debt & Coverage Ratios
Debt/Assets
Debt/Equity
Current Assets/Current Liability
EBITDA/Interest
Debt/EBITDA
Cash Flow Ops/Total Debt
Intrinsic value in 2021
0.49
1.74
1.22
8.17
8.90
0.15
Ind Avg
0.55
0.90
1.97
5.25
8.37
7.58
Base
Average Ceiling
$ 38.77 $ 46.52 $ 58.15
Consolidated Edison (ED) Stock
2016
2017
2018
2019
2020
2021
Revenues
Cost of Goods Sold
Selling, General & Administrative Expenses
Research and development
Operating Income
Net Interest Expenditure
Pre-Tax Income
Taxes
Net Income
1E+10
8E+09
2E+09
0
2E+09
7E+08
9E+08
7E+08
2E+08
1E+10
9E+09
2E+09
0
2E+09
7E+08
9E+08
3E+08
7E+08
1E+10
9E+09
2E+09
0
2E+09
7E+08
1E+09
3E+08
7E+08
1E+10
1E+10
2E+09
0
2E+09
7E+08
1E+09
3E+08
7E+08
1E+10
1E+10
2E+09
0
2E+09
7E+08
1E+09
4E+08
8E+08
1E+10
1E+10
2E+09
0
2E+09
7E+08
1E+09
4E+08
9E+08
Earnings Per Share
0.5651
2.1684
2.3205
2.4788
2.808
2.9857
Shares Outstanding
3E+08
3E+08
3E+08
3E+08
3E+08
3E+08
Consolidated Edison (ED) Bond
Firm
Debt & Coverage Ratios
Debt/Assets
Debt/Equity
Current Assets/Current Liability
EBITDA/Interest
Debt/EBITDA
Cash Flow Ops/Total Debt
Intrinsic value in 2021
0.33
1.03
0.89
5.25
4.29
0.22
Ind Avg
0.35
1.55
1.25
6.03
4.10
0.21
Base
Average Ceiling
$ 16.59 $ 19.90 $ 24.88
Northern Trust (NTRS) Stock
2016
2017
2018
2019
2020
2021
Revenues
Cost of Goods Sold
Selling, General & Administrative Expenses
Research and development
Operating Income
Net Interest Expenditure
Pre-Tax Income
Taxes
Net Income
5E+09
2E+09
2E+09
0
3E+08
3E+08
2E+09
4E+08
1E+09
5E+09
3E+09
8E+08
0
6E+08
3E+08
3E+08
9E+07
2E+08
5E+09
4E+09
9E+08
0
7E+08
3E+08
3E+08
1E+08
2E+08
5E+09
4E+09
9E+08
0
7E+08
3E+08
3E+08
1E+08
2E+08
6E+09
4E+09
9E+08
0
7E+08
3E+08
4E+08
1E+08
3E+08
6E+09
4E+09
9E+08
0
8E+08
3E+08
4E+08
1E+08
3E+08
Earnings Per Share
5.2528
0.9083
0.9863
1.0675
1.2364
1.3276
Shares Outstanding
2E+08
2E+08
2E+08
2E+08
2E+08
2E+08
Northern Trust (NTRS) Bond
Firm
Debt & Coverage Ratios
Debt/Assets
Debt/Equity
Current Assets/Current Liability
EBITDA/Interest
Debt/EBITDA
Cash Flow Ops/Total Debt
Intrinsic value in 2021
0.0669
0.99
0
1.3863
21.995
0.1855
Ind Avg
0.083
0.97
9.23
0.2587
51.338
0.1395
Base
Average Ceiling
$ 7.38 $ 8.85 $ 11.06
Macy's (M) Stock
2016
2017
2018
Revenues
Cost of Goods Sold
Selling, General & Administrative Expenses
Research and development
Operating Income
Net Interest Expenditure
Pre-Tax Income
Taxes
Net Income
3E+10
2E+10
8E+09
0
2E+09
4E+08
2E+09
6E+08
1E+09
3E+10
2E+10
5E+09
0
4E+09
0
4E+09
1E+09
3E+09
3E+10
2E+10
5E+09
0
4E+09
0
4E+09
1E+09
3E+09
Earnings Per Share
3.2582
Shares Outstanding
3E+08
2019
2020
2021
3E+10
2.1E+10
5.2E+09
0
4E+09
0
4E+09
1.2E+09
2.8E+09
3E+10
2E+10
5E+09
0
4E+09
0
4E+09
1E+09
3E+09
3E+10
2E+10
5E+09
0
4E+09
0
4E+09
1E+09
3E+09
7.8038
8.1159 8.44055
9.1158
9.4804
3E+08
3E+08 3.3E+08
3E+08
3E+08
Northern Trust (NTRS) Bond
Firm
Debt & Coverage Ratios
Debt/Assets
Debt/Equity
Current Assets/Current Liability
EBITDA/Interest
Debt/EBITDA
Cash Flow Ops/Total Debt
Intrinsic value in 2021
0.37
1.65
1.34
8.96
2.24
0.26
Ind Avg
0.29
0.92
1.19
9.64
1.90
0.13
Base
Average Ceiling
$ 52.67 $ 63.20 $ 79.00
Running head:
1
[Title Here, up to 12 Words, on One to Two Lines]
2
[Title Here, up to 12 Words, on One to Two Lines]
Company and market analysis: Industry trends
The selected companies to potentially form part of the investment portfolio are Apple,
Caterpillar, Consolidated Edison, Northern Trust and Macy’s. These companies are among the
strongest in their respective industries. In this regard, Apple, Caterpillar, Consolidated Edison,
Northern Trust and Macy’s are among the most relevant companies in the telecommunications
industry, automobile and truck industry, energy and utility industry, the investment and securities
industry, and the retail industry, respectively.
These industries have shown a relatively strong performance in the past years. For
example, the automobile and truck industry has kept steady growth in the past decade, in
significant part due to the result of the expansion of multiple companies into the Chinese market
(Plunkett et al., 2018a). They also present very promising expectations. For instance, financial
experts have estimated that the revenue of the telecommunications industry will increase by $6.5
trillion by the end of 2018 as the industry keeps attracting more and more customers (Plunket et
al., 2018b). As one of the most important companies, the expected industry growth will enable
the selected companies to increase their volume of sales, and hence the profitability, on the short
run, thus being a promising approach towards the obtention of a high return on the portfolio.
Such a positive trend is especially important considering how the analysis carried out comparing
the companies with their respective industry averages indicates the strength and better
performance of these companies.
Among the five selected industries, and taking the collected information into account, the
best performant sector would be the telecommunication industry. The fact that the world is
3
currently experiencing a boom in the establishment of new wireless connections and the sales of
the devices necessary to establish such relationships represent the ideal scenario for the financial
growth of any company operating in the industry. In this regard, customers expect that the
volume of sales will continue to increase at an exponential rate shortly, as long as such boom
trend remains (Plunkett et al., 2018b). On the other hand, the automobile and truck industry
shows a comparative advantage over the remaining three sectors. In this case, the expansion of
several companies into the Chinese market and the constant development of more effective
machinery products to use in agriculture and construction represent a favorable scenario for
companies like Caterpillar.
Portfolio: Assets
As stated previously, all five markets are expected to show positive results in the near
future. Moreover, most financial experts recommend portfolio diversification as one of the best
approaches to minimize the risk. From this standpoint, it is recommendable to maintain all five
companies as integrant parts in the portfolio. However, considering the identified absolute and
comparative advantages, and noting the expected outstanding financial performance of
companies like Apple, it is advisable that the portfolio weighs such assets to reflect the observed
trends. In this regard, a possible weight allocation would assign a weight of 40% to Apple assets,
a 30% to Caterpillar assets, and a 10% to Consolidated Edison, Northern Trust and Macy’s assets,
respectively. The weighted portfolio will enable the investor to obtain a high return at a reduced
risk on the long run.
4
Portfolio: Securities
Companies like Apple have shown a steady positive trend in their volume of sales in the
past years. Moreover, as outlined the market previously shows a highly optimistic scenario in
which the company would potentially benefit from the existing wireless boom. The fact that
nearly everybody wants to own a device to be able to connect to the rest of the world through the
Internet implies that the company's sales will continue to increase in the future. Moreover, the
high quality of Apple products and the stable customer relationship established by the company
ensures that the new customers acquired as a result of such wireless boom will remain using the
company's products. As such, it is possible to expect that such an increase in sales will be
sustainable in the long run.
As shown in table A.1, the company shows a generally better performance than the
industry average. For example, Apple seems to be highly efficient at using its assets as indicated
by the fact that the debt to assets ratio is substantially lower than the industry average.
The calculated intrinsic value of Apple stocks taking these data into account and the
observed trend in the historical financial results of the company ranges between $24.14 and
$36.21, being the average intrinsic value estimated of $28.97.
Portfolio: Rates of return
The annual rate of return of Apple stocks in the past year has been of 27.53%, which is
substantially higher than the rate of return of the reference market (SP500, 5.76%), once more
illustrating the outstanding financial performance of the company (Yahoo Finance, 2018).
Moreover, the company shows a 3-year monthly beta coefficient of 1.27, indicating slightly
higher volatility in the stock price as compared to the variability of the reference market index
5
(Yahoo Finance, 2018). Additionally, as illustrated from the graph shown in figure A.1, the
company’s stock price has increased substantially in the past five years. The calculated annual
rate of return as per the discounted cash flow model, on the other hand, would be of -1.51%,
calculated considering that the dividend growth rate is lower than the revenue growth rate.
6
References
Plunkett, Jack W., Plunkett, M. B., & Snider, I. J. (2018a). Automobile Industry
Introduction. Automobiles & Trucks Industry. Retrieved November 3, 2018, from
http://www.plunkettresearchonline.com.
Plunkett, Jack W., Plunkett, M. B., & Snider, I. J. (2018b). Introduction to the
Telecommunications Industry. Telecommunications Industry. Retrieved November 3,
2018, from http://www.plunkettresearchonline.com.
Yahoo finance. (2018). Apple Inc. Retrieved November 3, 2018, from
https://finance.yahoo.com/quote/AAPL/key-statistics?p=AAPL
7
Table A.1. Comparison of the performance of Apple stocks with the industry average
Firm
Ind
Avg
Debt & Coverage Ratios
Debt/Assets
0.27
0.46
Debt/Equity
0.59
0.40
Current Assets/Current Liability
1.35
4.05
EBITDA/Interest
0.34
-0.67
Debt/EBITDA
1.23
2.26
Cash Flow Ops/Total Debt
0.76
0.35
Figure A.1. Apple stock price in the past five years
Running head: MILESTONE ONE: COMPANY PROFILE
Milestone One: Company Profile
1
MILESTONE ONE: COMPANY PROFILE
2
Milestone One: Company Profile
Financial markets
Five-year performance of the domestic economy relative to the financial markets
The economic theory suggests a strong relationship between the performance of the
financial market and the country’s economy. In this regard, the announcement of a large
purchase or sale of government bonds has a strong influence on both the country’s gross
domestic product and consumer price index, as per the results obtained by Weale and Wiedalek
(2016).
Moreover, a prosperous economy increases the sales of companies, which will thus be
more appealing to potential investors. From this point of view, it is possible to expect that the
financial markets will mirror the major economic events taking place. As such, it is possible to
use the analysis of the financial statements of some of the country's most important companies to
obtain information about the country's economy. The US economy will likely continue to
increase at a rate ranging between 1 and 5% in the next five years (Weale & Wiedalek, 2016).
This growth rate is in good agreement with the forecasted 4% growth of the company’s revenues.
Specific market performance data based on the asset valuation model inputs
The application of the different asset valuation models to the forecasted financial
performance of the selected companies indicates that the various markets will show a mixed
performance in the short run. In this sense, it is noteworthy how the forecasted earnings per share
of companies like Apple or Northern Trust will tend to decrease as per the analysis carried out. In
contrast, the earnings per share of companies like Caterpillar, Consolidated Edison or Macy's
will likely increase shortly. Considering how these companies are among the leaders in their
MILESTONE ONE: COMPANY PROFILE
3
respective industries, it is possible to predict that the market will show a similar trend to the
forecasted one.
Impact of the five-year and current macroeconomic data on asset prices
Such a relationship arises from the link existing between the sales of a company, the
overall financial results, and the resulting appeal on investors, which will tend to buy or sell the
company's stocks. In this regard, this strong relationship existing between the domestic economy
and the country's financial market can potentially justify the use of the financial market trend as a
predictor of the future performance of the domestic economy. Such a claim focuses on the fact
that the most relevant financial crises in the past had been preceded by a rapid decrease in the
financial markets (Duca, 2007).
As a result, the domestic economy relative to the financial markets may be estimated to
remain relatively stable. In this sense, the forecasted earnings per share of the different
companies show both an increasing and a decreasing trend, indicating that even while there will
be variations in the relative importance of the various industries, the economy as a whole will
experience small variations shortly.
Company valuation
Analysis of the company’s financial items and key ratios
According to the study carried out, the target companies show a generally better financial
performance than their respective industry averages. In this sense, the attached Excel file
illustrates how the companies usually have higher efficiency in handling their debt through either
generating higher cash flow or a more effective cost control strategy than the industry average.
For example, companies like Apple have a substantially lower debt to EBITDA ratio and higher
MILESTONE ONE: COMPANY PROFILE
4
operating cash flow to debt ratio than the industry average, such that the company is more
capable of repaying its debt if compared to other companies operating in the same industry.
The intrinsic value of assets
One common approach used to estimate the intrinsic value of stocks takes into account
the earnings per share of the stock. In this regard, Amiri et al. (2016) propose the use of the ratio
between the forecasted earnings per share and a coefficient k as a useful tool to estimate the
intrinsic fair value of any stock. For this purpose, Amiri et al. (2015) suggest the use of 0.18,
0.15, and 0.12 as reasonable estimates for the rate for the estimation of the base, average, and
ceiling prices of the companies, respectively. Applying such rule, the intrinsic value of the
selected assets in 2021 would be:
Base price (k = 0.18)
Average price (k =
0.15)
Ceiling price (k =
0.12)
Apple
$24.14
$28.97
$36.21
Caterpillar
$38.77
$46.52
$58.15
Consolidated Edison
$16.59
$19.90
$24.88
Northern Trust
$ 7.38
$ 8.85
$11.06
Macy’s
$52.67
$63.20
$79.00
Stakeholders
Key stakeholders
The key stakeholders of the company’s financial portfolio are the managers and
employees, as they will benefit from the possibility of gaining access to the profits derived from
such investment portfolio.
MILESTONE ONE: COMPANY PROFILE
5
Common stakeholders
The common stakeholders, on the other hand, will be the investors that have purchased
the company’s stocks. In this sense, the higher profitability on the long run will indirectly benefit
the company’s stakeholders.
MILESTONE ONE: COMPANY PROFILE
References
Duca, G. (2007). The relationship between the stock market and the economy: experience from
international financial markets. Bank of Valletta Review, 36(3), 1-12.
Amiri, A., Ravanpaknodezh, H., & Jelodari, A. (2016). Comparison of stock valuation models
with their intrinsic value in the Tehran Stock Exchange. Marketing and Branding
Research, 3(1), 24-40.
Apple. (2018). Annual Report. Retrieved October 10, 2018, from
https://investor.apple.com/investor-relations/financial-information/default.aspx
Caterpillar. (2018). Annual Report. Retrieved October 10, 2018, from
https://www.caterpillar.com/en/investors/reports.html
Consolidated Edison. (2018). Annual Report. Retrieved October 10, 2018, from
http://phx.corporate-ir.net/phoenix.zhtml?c=61493&p=irol-reportsannual
Macy’s. (2018). Annual Report. Retrieved October 10, 2018, from http://www.macysinc.com/ir/
Northern Trust. (2018). Annual Report. Retrieved October 10, 2018, from
https://www.northerntrust.com/about-us/investor-relations/annual-report
6
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