The household & personal product industry is characterized by steady growth in demand, with little variation due to macro- economic factors, particularly in developed markets. Some developing markets exhibit more volatile demand in reaction to macro-economic factors. This industry is intensely competitive, with a comparatively small number of major multi-national competitors accounting for a large proportion of total global demand. The companies currently dominating the news for the industry are The Procter & Gamble, Colors, Recruit Benefices, and Hinkle GAG & Co. Gaga. The is the market leader, owning market share in the industry.
Market Value by Company – 2008 18% 2% 9% 62% The Procter & Gamble Colors Recruit Benefices Hinkle GAG & co. Gaga Others Source: Data Monitor, 2008 2 As these companies are international companies, it is necessary to take into careful consideration the economic conditions of the countries in which they operate. Namely, it refers to the three main regions where the companies operate: the United States, Europe, and Asia Pacific. The report is to analyze the performance as well as evaluate the intrinsic value of these four leading companies in the household & personal product industry.
The report uses the Topknot approach to the investment process, from summarizing the scope and application of Macroeconomic Analysis & Industry Analysis to Company Analysis with the focus on Financial Statement Analysis to evaluate the performance of the companies. Following this approach, the report is divided into three parts: – Part 1: Macroeconomics Analysis within which firms are placed. PEST model (political, economic, socio- cultural, technological influences) is used to analyze their impact on the industry currently and in the future.
In this part, Macroeconomics Variables such as GAP, interest rate, inflation rate, unemployment rate, and exchange rate are considered to gauge the health of a country economy. Part 2: Industry Analysis to which firms belong. The nature of competition in an industry is strongly affected by five forces. Porter’s Five Forces Model of industry competition has been utilized as an analytical tool to examine the competitive environment. These five forces include: Rivalry among Existing Firms, Threat of New Entrants, Threat of Substitute Products, Bargaining Power of Suppliers, and Bargaining Power of Buyers.
By analyzing these five forces, it allows the firms to have an insight into their company and how they perform among their competition. 3 ; Part 3: Company Analysis. In this chapter, through the company’s key business structure and operations, history and products, the report provides summary analysis of key revenue lines and strategy, the internal and external factors that affect the company’s performance in achieving its business goals. The report further presents the complete array of financial ratios of the company which points to the basic health of its activities.
It combines a complete STOW analysis of the company used to evaluate the company’s strengths, weaknesses, opportunities and threats, giving an accurate picture of the financial health of the company. By using Valuation models, the report brings to comparison between the intrinsic value of the companies and their share price on the market. From that, it evaluates performance and position of the company, and arrives at a sensible valuation, give an appropriate recommendation. The final part will highlight the main points for investment recommendation in the current economic conditions and conclude. 4 CHAPTER 2 —MACROECONOMIC ANALYSIS 5 2. . The Global Economy The financial crisis on the international financial markets, which started in the United States with the breakdown of the supreme mortgage market in 2007, as spread over the entire world to different degrees and markedly slowed down world economic growth in 2009. In the current situation, all economic indicators, regardless of which region or sector they refer to, point towards a continuation of moderate growth. In US, the assessments Of the present economic situation have been strongly down-graded. In Europe the economic climate indicator has declined in nearly all countries.
In Asia, the assessments of the present economic situation remain particularly low as well. Overall, the data confirms a global recessionary trend that the economic climate index mains in a recessionary period of 2009. In this part, PEST analysis is used to evaluate the impact of macroeconomic on household & personal product industry. % Political Future – Governmental regulations affect manufacturing, packaging, distribution of household & personal products industry The household and personal care industry is heavily regulated by the European union, the united States government and individual country government elsewhere.
For example, in the United States, many of the Company’s products are regulated by the Environmental Protection Agency, the Food and Drug Administration and the Consumer Product Safety Commission. In addition, the Company’s international operations are subject to regulation in each of the foreign jurisdictions in which it manufactures or distributes its products.
It is possible that the federal government will increase regulation of the transportation, storage or use of certain chemicals to enhance homeland security or protect the environment and that such regulation could negatively impact the Company’s ability to obtain raw material or increase costs. Loss of or failure to obtain necessary permits and registrations could delay or prevent the Company from meeting current rotgut demand, introducing new products, building new facilities or acquiring new businesses and could adversely affect operating results. Failure to assert the Company’s intellectual property rights could impact its competitiveness The Company relies on trademark, patent and copyright laws to protect its intellectual property rights. However, the Company cannot be certain that these rights, if obtained, will not be invalidated, or challenged in the future, and the Company could incur significant costs in connection with legal actions to defend its intellectual property rights.
In addition, even if such rights are obtained such as in the United States, the laws of some of the other countries in which the Company’s products are sold do not protect intellectual property rights to the same extent as the laws of the United States. If other parties infringe the Company’s intellectual property rights, they may dilute the value of the Company’s brands in the marketplace, which could diminish the value that consumers associate with the Company’s brands and harm its sales.
The failure to perfect or successfully assert its 7 intellectual property rights could make the Company less competitive and loud have a material adverse effect on its business, operating results and financial condition. – Policy changes by the new US government like the recent budget proposal regarding income made overseas President Beam’s administration has proposed a revision in the policy on deferred tax on overseas income by IIS corporations. Per existing law, IIS companies can defer payment of taxes on foreign income until the income is brought back to US.
The revision will be unfavorable for all companies, including Procter & Gamble, which have sizable foreign revenue. If the revision is passed, the overseas profits which are currently ploughed back in he same markets will be taxed immediately and will severely impact the Company. (Source: Dolomite, 2008) 3/4 Economic Future A weak economic outlook is likely to depress the demand for the company’s products, impacting the revenues of the company. In many countries, the insufficient demand has become the major economic problem at present.
However, global GAP growth is expected to improve in 2010 with the growth rate estimated at 2. 5%. (Source: Business Monitor International, 2009) – Commodity price increases All the household & personal product companies depend on a number of raw commodities. These Companies face a volatile cost environment, largely driven by cost pressures, including commodity costs, primarily resin and agricultural commodities, and increased energy-related manufacturing costs. Commodities are the largest single cost for these 8 companies and this unusual rise in commodity prices has significant impact on their bottom line. The Company is exposed to foreign currency risk associated with foreign governments imposing currency remittance restrictions. As the household & personal product companies are operating internationally, most of its sales and earnings in foreign currency but they are ported in domestic currency, the companies face significant foreign exchange transactional exposure. Moreover, although these companies use some financial instruments to hedge against foreign currency volatility risks, they are not fully protected against foreign currency fluctuations and their reported earnings may be affected by changes in foreign exchange rates. /4 Socio – Cultural Environment – Green initiatives The environment and products that are safe for the environment have made an impact on the household & personal products industry and will continue to do so in the future. Companies in the industry are adopting green initiatives because they want to be socially responsible corporate citizens and it makes economic sense. Consumers are demanding green products because such products are considered safer for people as well as for the environment; therefore, there has been a shift in buying behavior towards companies perceived to be green.
The household & personal product industry is starting to adopt green initiatives throughout its business systems. Regulations on what raw materials can be put into products that are considered earth friendly have forced companies to research new and improved ways of manufacturing. Many companies have started to use organic material in 9 their products to make them safer for the environment. The packaging of their products has also changed and the use of recycled materials is now the common ingredient for their containers. World’s population is getting older (baby boomers) Population in developed countries is getting older, with the largest proportion of people aged over 65 to be found in the countries where the overall population is shrinking. The aging baby boomers and their changing lifestyle have been a source of new product development by consumer product impasses. In many categories, boomers will represent over 50% Of consumption and will comprise a majority of share growth. With such a major share of sales coming from aging populations, companies offering niche products targeted at this segment will benefit from this trend. Global Insight, 2008) % Technological Future Technological advances have changed the household & personal product industry. The advance in technology is making it easier to manufacture their products which will lower the cost to produce. Companies are going to be forced to modify their current production procedures or they will not be able o compete within the industry. Companies that fall behind on the advancing technologies will not be able to offer the same pricing for their products because their production costs will remain higher than their competitors. 2. 2.
The United States Market The largest and still the most important market in the world, the US economy is not rosy. The US government has spent trillions of dollars in order to weather the financial crisis. Although economic activity is likely to remain weak for a time, it is anticipated that policy 10 actions to stabilize financial markets and institutions, fiscal and monetary tumulus, and market forces will support a strengthening of economic growth. U Gross Domestic product (GAP)I The US GAP is worth 314,Bibb or 22. 91% of the world economy (Source: IMP, 2009).
The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. However, GAP increased at an annual rate of 3. 5% in the third quarter of 2009, according to the estimate released by the Federal Reserve Bank of SST. Louis, 2009. The increase in real GAP in the third quarter primarily reflected higher consumer spending, exports, robust government spending, and residential fixed investment. In spite of sign of recovering in the third quarter, the recession in the United States will continue throughout the year.