Tuesday, June 28, 2022

Inventory Spikes

During 2021, much of the talk concerning inventory surrounded shortages due to a variety of factors. In response, many companies increased production and orders to combat supply chain disruptions and increased consumer demand coming out of COVID-19 lockdowns. Now, it appears that companies have overshot demand as inventories have surged. For example, inventories for global manufacturing companies reached a record $1.87 trillion. As a result, inventory turnover for manufacturers increased to 81.1 days. And retailers are no different: Inventory for Macy's, Target, Walmart and other large retailers has increased from 17 to 45 percent compared to last year. This increased inventory is a boon for off-price retailers like Ross and TJ Maxx, which have a larger supply from big retailers offloading inventory. For many corporations, the excess inventory will likely negatively impact the bottom line. 

Thursday, June 23, 2022

Bad Luck Investing

Hopefully you realize that the best time to invest is when stock prices are low and the worst time is when prices are high. But patience is a virtue and can have rewards. A recent article introduces Betty Badluck, who just happened to invest at the stock market tops during the past 35 years. So what happened to Betty? As you will see, while the returns were not fantastic, over time, the stock market has historically rebounded and she still has three times her investment in real terms. This is an important note on stock market history: While we can't predict the future, over the long-term, the stock market has historically provided positive returns.

Monday, May 9, 2022

TIE Increases

As we discussed in the textbook, in general, there is no absolute number that is best for a particular financial ratio. However, when the economy is bad or uncertain, it is better if leverage ratios are more conservative to help avoid financial distress. During the COVID lockdowns, this is exactly what happened to the times interest earned (TIE) ratio for most companies. The median TIE increased from 6.1X prior to the pandemic to 8.6X during the pandemic. This was true even for below investment grade companies, which showed an increase in the TIE from 2.8X to 4.1X. Given that the cost of borrowing is beginning to rise, this bodes well for companies.

Tuesday, May 3, 2022

SEC Sues Vale SA

In January 2019, the Brumadinho dam in Brazil collapsed, sending a mudflow that killed 270 people. The dam was built by Vale SA to hold tailings from a copper mine. Now, the SEC is suing Vale SA, stating that the company made false claims about the safety of the dam, obtained fraudulent stability certificates, and regularly misled investors through its ESG statements. The SEC does not require that companies file ESG statements, but the Climate and ESG Task Force of the SEC is tasked with identifying false or misleading claims. In other words, consistent with its other directives, the SEC is concerned about the truthfulness of statements and disclosures made by a company. 

Monday, May 2, 2022

Rivian Lockup To Expire

Electric car company Rivian went public on November 9, 2021, which means its lockup, scheduled for 180 days after the IPO, is scheduled to expire next week. A lockup prohibits early investors and corporate insiders from trading the company's stock prior to the lockup expiration. In this case, Ford and Amazon are two early investors with large stakes in Rivian, but nether has indicated whether it will sell Rivian shares. A stock price can often drop significantly after the lockup as large shareholders attempt to sell shares. However, Rivian is down about 70 percent from its IPO price, so a price drop after the lockup may not happen. For example, Meta Platforms and Uber both saw price increases after the lockup. As the article states, the market is forward looking, so the potential price drop may already factored into the stock price.

Tuesday, March 15, 2022

NPV Analysis

It is always interesting to see a real-world application of concepts you have learned in class. Recently, Voyageur Pharmaceuticals Ltd. released the results of its capital budgeting analysis of a barium sulfate project in British Columbia, Canada. Notice the company repeatedly refers to the project NPV, but also calculates the IRR and payback period. The report includes the key variable assumptions and the NPV per share. What we also find interesting is the sensitivity figure near the bottom of the article. The company shows the sensitivity of the project to changes in operating costs, revenue, and capital. It appears that the NPV of this project is most sensitive to changes in revenue.

Century Bonds Issued

With the threat of an increase in interest rates, it appears to be a good time for borrowers to lock on interest rates for a long time. TTUN is the latest to do so, issuing $1.2 billion worth of century bonds, that is bonds with a 100-year maturity, at a coupon rate of 4.45 percent. At the same time, TTUN issued $800 million of 30-year maturity bonds at 3.5 percent. Other Big Ten universities, including the University of Minnesota, Michigan State University, Rutgers University, and THE Ohio State University have issued century bonds in recent years.