The instance capable revolves around MiniScribe. a maker of disc storage merchandises that is under the ticker list for rumours directed to the firm’s jobs with hard currency flow and stock list. The aim of the study is to come up with a BUY OR DON’T BUY recommendation for Alexander & A ; Ferris utilizing the available fiscal and qualitative information.
The analysis was conducted by deducing extra information from available fiscal informations and continuing with an reading of the consequences in visible radiation of qualitative information. The group developed determination lists for a BUY or DON’T BUY recommendation and these were compared against relevant factors that assess the profitableness. efficiency. and sustainability of a company.
Following a thorough analysis of the fiscal statements. fiscal ratios. and industry tendencies. the determination is to continue with a DON’T BUY recommendation. On the rating of profitableness. disbursals are increasing at a faster rate than gross revenues. and hard currency flow generated by operating activities is steadily worsening. even making negative values towards the 3rd one-fourth. MiniScribe’s place on research and development investings. while it maintains its good repute in the stock market. is excessively high to keep sing the firm’s consuming hard currency resources. As disbursals addition. jobs in hard currency flow and plus direction go more and more important. MiniScribe’s resources are locked in quickly increasing stock lists and A/R balances as indicated by increasing turnover yearss. Inefficient stock list direction and long aggregation periods lead to more uncertainties on MiniScribe’s ability to stay liquid. Further prosecuting this analysis. liquidness is a premier concern because MiniScribe has been fall backing to short-run adoptions and debt to turn to its hard currency flow jobs. With diminishing hard currency balances and increasing current liabilities. MiniScribe’s uncontrolled short-run debt raises uncertainness in the company’s sustainability.
MiniScribe must be placed on a DON’T BUY recommendation because its current place does non pave manner for continued high net incomes for investors. I. POINT-OF-VIEW
The analysis of Miniscribe Corporation’s fiscal public presentation will be taken from Paula Perry’s position as a research analyst for Alexander & A ; Ferris. a securities firm house.
II. CASE CONTEXT
While one time a promising investing in its early life. Miniscribe is rumored to be sing hard currency flow and stock list jobs after a direction coup d’etat and restructuring.
Brief History of Miniscribe:1. Entered the market and posted surging grosss ; Was one time Wall Street’s favorite 2. Lost its impulse and badly went down when its clients ( IBM ) started bring forthing their ain disk-drives 3. Invested in R & A ; D which earned them a good repute and stock monetary values that continuously increased 4. The province of the market is looking black and MiniScribe’s fiscal statements show that the company is non executing good 5. Future programs of MiniScribe: diversify merchandises to infiltrate new market sections Should Alexander & A ; Ferris. a securities firm house. go on to retain Miniscribe on its “Buy” Recommendation List?
III. PROBLEM DEFINITION
The study intends to come up with a BUY or DON’T BUY recommendation for Alexander & A ; Ferris. as supported by the group’s in-depth analysis of available quantitative and qualitative Information.
The analytical methodological analysis requires the followers:1. Definition of the standards or factors for consideration for the recommendation ; 2. Organization of available informations. which includes the followers: 1. Historical recording of events that transpired from 1980-1988 comparing company and industry reappraisals. 2. Preparation of Fiscal Statements ( Income Statement and Balance Sheet for 1st-3rd One-fourth of 1988 ) ; 1. Extraction of extra information from available informations to recognize the undermentioned informations: 1. Profitableness. Liquidity. Asset Management. and Fiscal Leverage Ratios ; 2. Tendencies for company public presentation and industry public presentation ; 1. Designation of relevant informations to be used for analysis ; 2. Interpretation of quantitative informations in visible radiation of qualitative informations. and vice-versa through: 1. Benchmarking with the industry ;
2. Examination of fiscal statements and fiting the findings from analysis with events and motions within the industry ; and 3. Development of determination lists supportive of pick recommendation – BUY or DON’T BUY ; 1. Comparison of the determination factors created with the standards established to get at a determination
To assist the group analyze which determination to prosecute. the group comparings which supports quantitative and qualitative information from urging to BUY or NOT TO BUY. Angstrom. Support to maintain MiniScribe in the recommendation list
There are five points to maintain MiniScribe in the recommendation list. as evidenced by quantitative and qualitative informations derived by the group. as follows:
First. gross revenues stay positive and is comparatively stable as evidenced in Exhibit 1. Amalgamate Income Statement and in Exhibit 2. Horizontal Analysis – Trend Percentages of the Income Statement.
Exhibit 1. Amalgamate Income Statement
Exhibit 2. Horizontal Analysis – Trend Percentages of the Income Statement
This shows that its merchandises are still salable. It is besides evidenced that there is increasing demand for 3 1/2-inch disc thrusts. MiniScribe dominated the 3 1/2-inch-drive market.
Second. the company has a positive underside line. or Net Income. that leads to positive income per portion. This is evidenced as good in Exhibit 1. Amalgamate Income Statement. It shows that MiniScribe is still profitable and investors may still keep their portions in the company.
Third. MiniScribe still has positive and stable Return on Equity as evidenced in Exhibit 3.
Exhibit 3. Return on EquityThis can be much explained utilizing Du Pont Equation and through analysing the information. shown in Exhibit 4. Du Pont Analysis. even though cost direction is someway uneffective. the company still generates income and investings can be done from this and other beginnings of funding.
Exhibit 4. Du Pont AnalysisFourth. MiniScribe has a good repute for their R & A ; D Commitment. Investing activities are high as evidenced in Exhibit 5. Amalgamate Statement of Cash Flow.
Exhibit 5. Amalgamate Statement of Cash Flow
This shows that Property. Plant. and Equipment was given precedence for Research and Development activities. which ranked 3rd in the disbursals with most disbursement. as evidenced in Exhibit 6. Vertical Analysis – Common Size of the Income Statement.
Exhibit 6. Vertical Analysis – Common Size of the Income Statement
Besides. in 1987. Electronic Business. a taking trade diary. ranked Miniscribe second in R & A ; D disbursement with a 131. 7 % addition over 1986. Further prosecuting this stigmatization scheme. it is a likely the instance that MiniScribe earned itself a loyal following.
Fifth. MiniScribe plans to diversify and research other market sections. Investing activities are high as evidenced in Exhibit 5. Amalgamate Statement of Cash Flow. seen above. There’s besides a drastic addition in Research and Development disbursal as evidenced in Exhibit 2. Horizontal Analysis – Trend Percentages of the Income Statement supra. This shows that MiniScribe has good programs in constructing new merchandises so they can take the lead in the market. This is besides evidenced that due to rapid technological alteration. the US Personal computer market is traveling down and MiniScribe responds by be aftering diversify its merchandise lines to suit other market sections. like disc thrusts for FAX machines. optical maser pressmans. and photocopiers.
Last. Miniscribe shares’ monetary value is above industry degree when the industry faced a worsening portions monetary value. This is evidenced in Exhibit 7. MiniScribe vs. Industry Share Price.
Exhibit 7. MiniScribe vs. Industry Share Price
Keeping shares’ monetary value to be above the industry degree have been brought by ruling the 3 1/2-inch phonograph records drive market. which had expected orders to entire 10M. 45 % market portion and continued attempt in developing new merchandises and inventions through puting in research and development.
B. Support to take MiniScribe out of the recommendation list
Following the analysis of the current fiscal state of affairs of MiniScribe against the context of industry tendencies and the company’s history. the determination is for Alexander & A ; Ferris to prosecute a DON’T BUY recommendation.
VII. SUPPORT ( BASIC JUSTIFICATIONS )
MiniScribe and its portions are non executing good based on the count of profitableness. hard currency flow. and debt standing.
1. Profitableness – The chief factors used in measuring profitableness are gross revenues. operating disbursals. and the resulting net income.
Gross saless of MiniScribe have shown worsening growing rates. To raise growing rates in gross revenues will present trouble due to the province of overcapacity in the industry and the rise of viing houses. Expenses are turning at a much faster rate than gross revenues which deplete net income and net incomes available to stockholders. Specifically on R & A ; D. disbursals are increasing at high rates and this will go on to increase with the planned effort to diversify merchandise lines. This degree of disbursement entail hazard and more disbursals. which MiniScribe can no longer afford given the tendency in gross revenues and sing the depleting hard currency resources generated by operating and funding activities.
2. Efficiency and Cash Flow – An rating of hard currency flow leads to critical concern findings on a firm’s efficiency and operating activities that besides gives an indicant on the sustainability of a house.
A/R and Inventories. The company’s liquid resources are hampered by quickly increasing stock lists and A/R balances. Hazardous possibilities come with increasing receivables and aggregation periods where effects can ache hard currency flow and consequence to adoptions and its associated disbursals. Similarly. stock lists are quickly increasing which poses a job because these stocks may shortly go disused. sing the on-going technological promotions in the market. Due to long aggregation periods and low stock list turnover. hard currency generated by operating activities is at a uninterrupted diminution. dropping to negative values on the 3rd one-fourth.
Cash balances are traveling down because resources are trapped in nonmoving stock lists and ungathered receivables. These inefficiencies in the direction of assets infer uncertainness in MiniScribe’s ability to bring forthpositive future net hard currency flows.
3. Debt V. Liquidity – Uncontrolled debt can take to higher costs. losingss. and even bankruptcy.
As a response to consuming hard currency resources. MiniScribe relies to a great extent on short-run adoptions. However. the company’s operations do non bring forth adequate hard currency to pay off these liabilities. Cash ( and equivalents ) to current liabilities ratio is really low and MiniScribe’s ability to run into its duties is questionable. Short-run adoptions continue to burthen the company with disbursals that its current assets will non be able to run into.
The hereafter of MiniScribe does non look assuring. Gross saless are at worsening growing rates and these posted grosss are largely in histories receivable. Histories receivables revolve around long aggregation periods and this is matched with low stock list turnover. To retain positive hard currency balances. the house has to fall back to adoptions. However. the inefficiencies around plus direction lead to jobs with liquidness and inability to run into quickly surging short-run adoptions and histories collectible balances. Give its current fiscal status and foreseeable hereafter ( at least in 1-2 old ages ) . MiniScribe is non a good bargain for investors who seek investings with a high gaining possible or portions for which they can expect an addition in value.
VIII. OPERATIONALIZING DECISION
The class of action following the DON’T BUY recommendation is outlined below:
1. Alexander & A ; Ferris to put MiniScribe under a DON’T BUY recommendation
2. Alexander & A ; Ferris to sporadically measure MiniScribe against other companies within the same sector.
a. Significant betterments in gross revenues tendencies. solvency ratios. stock list direction. and the aggregation of histories receivable balances shouldoriginate a reappraisal and if valid. a reconsideration of the recommendation.
Exhibit 8. Horizontal Analysis – Trend Percentages of the Income Statement Graph
Exhibit 9. Amalgamate Balance Sheet
Exhibit 10. Horizontal Analysis – Trend Percentages of the Balance Sheet
Exhibit 11. Horizontal Analysis – Trend Percentages of the Balance Sheet Graph
Exhibit 12. Vertical Analysis – Common Size of the Balance Sheet
Exhibit 13. Calculation of Purchases
Exhibit 14. Profitableness Ratios
Exhibit 15. MiniScribe vs. Industry Liquidity Ratios
Exhibit 16. Miniscribe vs. Industry Current Ratio
Exhibit 17. Miniscribe vs. Industry Quick Ratio
Exhibit 18. Miniscribe vs. Industry Current Liabilities to Net Worth Ratio
Exhibit 19. Miniscribe vs. Industry Total Liabilities to Net Worth Ratio
Exhibit 20. MiniScribe vs. Industry Asset Management Ratios
Exhibit 21. MiniScribe Leverage Ratios
Exhibit 22. Historical OverviewDATE| MINISCRIBE| INDUSTRY| ANALYSIS|1980| Terry Johnson started Miniscribe Corporation| | | Oct-81| First Shipment| | |1981| $ 81. 000 Sales| | |1983| $ 77M Sales| | The rapid growing of Miniscribe. for the greater portion. can be attributed to IBM’s orders. which accounted for 61 % of their gross revenues. Consequently. the company is vulnerable to the buying activities of IBM. | | IBM accounted for 61 % of Sales| | | Nov-83| IPO at $ 11. 50/share| | | Jan-84| IBM cancelled/rescheduled orders| SHAKE-OUT| SHAKE-OUT| | Growth of personal computer industry slowed significantly| | | 2H 1984 – 1H 1985| Reduced gross revenues. big losingss. heavy R & A ; D disbursement and major capital outgos ( Singapore Facility ) | | | 1Q 1985| Severe liquidness crisis| | MINISCRIBE: CRITICAL| 2Q 1985|
Hembrecht & A ; Quist ( venture-capital house ) infused $ 20M capital| | While Miniscribe’s cashflow direction was questionnable. their move to put in offshore installations must hold been a good one since it attracted venture-capitalist Hembrecht & A ; Quist | | Q. T. Wiles. Chairman of the Board of Hembrecht & A ; Quist. became Chairman of the Board and CEO of Miniscribe: Positive Image/Reputation| | | | Realigned Senior Management and Organization Structure| | | | Reorganization focused on set uping house into 5 specialised divisions. ensuing in the full company runing with a renewed entrepreneurial spirit: Fiscal consequences became the sole determiner for employee inducements and benefits| | | | Aggressive Financial Management| | MINISCRIBE: REBOUND| 3Q 1985| Revival in Gross saless: Profitable again| | Miniscribe’s leading and organisational restructuring and financial controls must hold been the losing ingredients for the company’s success. The renewed image of the house may hold attracted Wall Street once more as portion monetary values rebounded from a slack. | | New merchandises received good by market ; Favorable proficient reviews| | | | Gross saless made to to both just-in-time distributers and major computed companies such as Apple. Digital Equipment. and CompuAdd| | | 1987| To keep market portion. emphasized R & A ; D committedness ;
Electronic Business. a taking trade diary. ranked Miniscribe second in R & A ; D disbursement additions with a 131. 7 % addition over 1986| Major rivals of Seagate Technology ( Computer Memories. Micropolis. Maxtor. Quantum. and Priam ) had combined gross revenues of less than $ 1 Billion for the year| Miniscribe’s Common Stock Monetary values from 1986-1988 reflects the company’s claims. how it rebounded from its 1985 floating-point operation and how its portion monetary values grew from 1895 to 1988. | | Stock monetary values reflected positive information: Share monetary value rebounded from a depression of $ 1 in 1985 to $ 13 in July 1988| | Miniscribe’s common stock monetary values reflects a steep diminution between 1987-1988. which was disregarded in the company’s studies. | 1987-1988| | Four new companies entered the industry. taging the first entrants. since 1984 shake-out| | 1988| | Disk-drive industry dominated by Seagate Technology with Gross saless over $ 1. 3 Billion| | 3Q 1988| Became the 2nd largest manufacturer of disc thrusts in the US| | Miniscribe seemed to hold come from nowehere by 3Q 1988. In 1987. it wasn’t even considered a major rival of Seagate. when they were purportedly profitable once more. We might hold to measure if this is merely a Game of Perception. as is the instance in Wall Street with rumours and negative promotion posting sedate effects on portion monetary values. | |
Reported 13th back-to-back one-fourth of increased gross and profits| | | | Company functionaries expected the company to be listed among the Fortune 500 by year-end 1988| | | | Became one of Wall Street’s favourite stocks and recommended by many investing analysts| | | Jan-Oct 1988| | Competition for gross revenues was intence ; Heated monetary value war dur to overcapacity throughout the industry| POSSIBLE SHAKE-OUT FORECASTED| | | Average cost of a megabyte memory had fallen about 25 % | | | | Dataquest estimated universe production capacity to be over 17M disc thrusts. but anticipated merely 14M will be purchased = Intense Price Competition + Inventory Write-offs| | | | Changing Market Tastes: From 5 1/4-inch disc thrusts to the 3 1/2-inch drives| Both the market and developments in engineering are ever-evolving. | | |
Dataquest expected orders to number about 10M 3 1/2-inch thrusts. 4M 5 1/4-inch drives| | | From all outward visual aspects. Miniscribe had made the turnaround and was on its manner to going a billion-dollar company ; Gross saless and Net Income increasing each one-fourth. market portion was approximately 16 % of the world’s disk-drive market ; Dominated 3 1/2-inch disk-drive section. accounted for 45 % of Sales| Miniscribe dominated 3 1/2-inch-drive market| Miniscribe dominated the 3 1/2-inch disc thrust market. which had expected orders to entire 10M. Minsicribe’s portion in the market accounted for 45 % of their entire gross revenues. Meanwhile. the demand for the 4 1/4-inch thrusts was worsening. | | |
Rapid Technological Change exerted considerable force per unit area on company on a company to turn stock list every bit quicky as possible. | REFER TO EXHIBIT 4: Efficiency ratios were worsening from Q1 to Q3. Players were holding troubles. | | | Recent market entrants utlized modified design that resulted in lower production costs| Competition besides takes into consideration production costs. Players can take a ball out of the market. but this does non needfully interpret to profitableness. | | | Paula learned that established houses were invariably looking for new markets for smaller disc thrusts – Forecasted growing in the US Personal computer market would worsen from 29 % in 1987 to 17 % in 1988 and 9 % in 1989| Miniscribe’s committedness to R & A ; D and its leaning to research new segments/markets was someway an confidence to investors that Miniscribe intends to remain competitory and prolong itself through the US PC market’s forecasted diminution in growing. | Oct-88| Share monetary value declined to a small over $ 8 as industry competition increased ; Similar stock lessenings besides occurred for primary rivals ( reflected in Exhibit 3 ) | | Miniscribe attributed diminution of portion monetary values to industry conditions – all participants were confronting the same reverses as competition increased. In so making. Miniscribe was claiming that the causes for diminution was non internally caused. They were banking on their repute as a believable corporation. | | Employed more than 8. 350 people worldwide| | |
| Maintained production installations in Colorado. Singapore ( accounted for 80 % Gross saless and was one of the largest and most sophisticated workss in the state ) and Hong Kong ( where printed circuit boards were made. expected section to bring forth over $ 300M in 1989 gross revenues ) thereby doing Miniscribe the largest electronic manufacturer| | If so Miniscribe was traveling with the market trends consequently. supplying the right merchandises to the market at the right topographic point and clip. so maybe it would be safe to urge to retain Miniscribe in the “BUY” list. However. we do non hold the information to back up this claim if we rely on the readings entirely. |