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The Murray Ohio Manufacturing Company

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Presentation on theme: "The Murray Ohio Manufacturing Company"— Presentation transcript:

1 The Murray Ohio Manufacturing Company
Presented by: Vincent, Shaoying, Mary, Yuting, and Feny

2 Agenda Strategy Analysis Accounting Analysis Financial Analysis
Prospective Analysis Conclusion Subsequent Developments

3 Strategy Analysis Bicycles Power Mowers
Established in 1936 as a bicycle manufacturer Based in Nashville, Tennessee By 1984, Murray Ohio manufactured approx. 1/3 of the bicycles made in the U.S. Power Mowers Started manufacturing power mowers in 1968 By 1984, one of the largest manufacturers in the U.S. In 1985, formed new marketing subsidiary “Sabre Corporation” to market to outdoor power equipment dealers Dealers participated in higher priced mower market

4 Rivalry Among Existing Firms
Porter’s Analysis Rivalry Among Existing Firms Bicycle: High Main competitors include Huffy, Roadmaster, Columbia, and Ross MO has long history and established significant market size Increasing rivalry expected as more firms enter the attractive market (both domestic and foreign import) Power Mowers: Medium to Low Main competitors include Western International, Roper, MTD, and Aircap 152 firms produced lawn and garden equipment in the U.S. in 1982 Estimated that MO has significant market power as one of the largest manufacturers in power mowers Rivalry is expected to increase significantly as imports continue to grow rapidly

5 Porter’s Analysis Threat of New Entrants Bicycles: High
Expectation of long term demand for bicycles remain strong However, increased competition into the market from imports from the Far East makes it less profitable for new entrants Power Mowers: Medium Despite increasing import competition, markets are attractive expected increase in constant dollar shipments at compound annual growth rate of 4% Growth due to increase in real disposable income, increase in replacement demand, growth in housing starts

6 Porter’s Analysis Threat of Substitutes Bicycles: High
Bicycles are common, and range in prices Different styles and makes are widely available through many outlets Alternative recreational equipment widely available Power Mowers: Medium to High Mowers are also common, and range in prices 152 firms produce lawn and garden equipment in U.S. Alternative law and garden equipment such as manual mowers, shears, etc. available

7 Bargaining Power of Buyers
Porter’s Analysis Bargaining Power of Buyers Bicycles: High Buyers demand depends on discretionary income for recreational equipment Higher income households comprises a major portion of the market Power Mowers: High Buyers demand depends on level of real disposable income and health of household

8 Bargaining Power of Suppliers
Porter’s Analysis Bargaining Power of Suppliers Bicycles: Medium Manufacturing since 1936 Assumed established relationships with suppliers Supplier power may change with market demand Power Mowers: Medium Entered market in 1968 Also assumed established relationships with suppliers Supplier power may also change with market demand

9 Implications and Conclusions
Porter’s Analysis Implications and Conclusions Strong history of success in early years of operation in both bicycle and power mower sectors Market demand is largely dependent on the economy and disposable income Competition from imports expected to increase in bike industry, resulting in decrease in MO’s operating profits Sustaining growth potential for the mower segment

10 SWOT Analysis Strengths
Long history of bicycle manufacturing experience Variety of distribution channels Centralized manufacturing facility Full line of bicycles and mowers Large market share implies high brand awareness Weaknesses Lack of competitive advantage in quality and manufacturing productivity Lack of innovative product development to capture market Mower segment is performing significantly better than bike segment despite bike segment’s longer operating history

11 SWOT Analysis Opportunities Bicycles:
Expectation of long term demand for bicycles remain strong Power Mowers: expected increase in constant dollar shipments at compound annual growth rate of 4% Growth due to increase in real disposable income, increase in replacement demand, growth in housing starts Import of garden equipment also expected to continue to increase especially in lower priced models Introduction of higher scale “sabre” line has potential for increased profitability Threats Increased competition from foreign producers which competes on the basis of lower costs of production Competition from going domestic manufacturers Fluctuating demands as a result of economical changes

12 Implications and Conclusions
SWOT Analysis Implications and Conclusions Bicycles: Lack of competitive advantage to compete with foreign producers High amounts of capital required to implement above strategies Note: Currently borrowing to pay dividends Questionable ability to achieve low cost given past history with bike mfg. Note: Acquiring low cost production performance takes time Power Mowers: Growing industry and expanding product line offerings Stable and maintaining growth and profitability

13 Plans to Improve Future Performance
Plans and Strategies Plans to Improve Future Performance Adopting aggressive bike pricing structure Improve manufacturing productivity Introduce new and innovative products Lobby U.S. Congress to increase import tariffs on bikes

14 Case Discussion 1 Based on the new proposed strategy, can the company improve their sales for bicycles and power mowers? Yes, why? No, why

15 Accounting Analysis Adjustment #1--- Investment Tax Credit
Accounting policy changed from deferral to flow-through NI should be reduced by $ 1.4M Adjustment #2 --- Tax on International Sales Operations Potential payment of deferred taxes for prior years for company’s export sales was eliminated NI should be reduced by $0.92M

16 Accounting Analysis Adjustment #3 --- Pension Plan
Assumed rate of return increased Employment level changed Pension expense decreased NI should be reduced by $0.763M U.S. owned company, so over-funding is company owned (take over target appeal) Adjustment #4 --- Gain form Settlement of Law Suit Law suit receipt in 1984 was $0.85M NI should be reduced by $0.085M

17 Accounting Analysis $7.825M (1.4) (0.92) (0.763) (0.085) $4.657M
Net Income before Adjustment $7.825M Adjustment for ITC (1.4) Adjustment for Income Tax (0.92) Adjustment for Pension Plan (0.763) Adjustment for Receipt of Law Suit (0.085) Net Income after Adjustment $4.657M

18 Financial Analysis - DUPONT
NI/Sales Sales/Assets Assets/SE ROE 1982 5092/288642 =0.0176 288642/171732 =1.68 171732/80741 =2.127 0.0628 1983 12374/386493 =0.032 386493/188845 =2.0466 188845/109368 =1.7262 0.1131 1984 7825/383589 =0.0203 383589/209777 =1.828 209777/112721 =1.8617 0.0690 Adjust to income 4657/383589 =0.0121 0.0410

19 Financial Analysis - DUPONT
Net Profit Margin – low profitability Asset Turnover – less efficiently using the assets Financial leverage Assets almost twice of the equity ROE Lowest in recent years

20 Financial Analysis Sales Profits 1982 1983 1984 Power Mowers 54% 53%
62% 73% 68% 88% Bicycles 46% 47% 38% 27% 32% 12%

21 Bicycle and Parts Shipments
Financial Analysis Bicycle and Parts Shipments (in million) 1980 1981 1982 1983 1984 Domestic 649 733 565 644 683 Imports 281 327 208 329 494

22 Lawn and Garden Equipment Shipments
Financial Analysis Lawn and Garden Equipment Shipments (in million) 1980 1981 1982 1983 1984 Domestic 2419 2270 2387 2536 2956 Imports 26 30 40 66 184

23 Cash Flow Analysis 1984 1983 1982 Working capital from operations
10,026 17,344 10,227 Change in A/R 13,898 (16,176) (3,312) Change in inventory (27,687) 723 8,897 ….. Cash flow from operations (14,151) 17,329 8,365 Additions to PPE (10,878) (5,863) (6,277) Cash flow before dividends (23,803) 11,817 2,203 Less: cash dividends (4,650) (4,119) (3,701) Cash flow after dividends (28,452) 7,698 (1,498)

24 Class Discussion 2 As security analysts:
Would you keep the company’s stock under the equity income fund? Would you keep a different equity portfolio? Would you consider to sell it?

25 Forecasting-Assumption
Best Most Likely Worst Sales Growth 6% 1% -2% NOPAT 4% 2% After Tax Interest on Debt 30% 33% 36% Net Operating Working Capital/Sales 20% 23% 26% Net Operating Long Term Assets/Sales 11% 14% 17% Net Debt/Net Capital 22% Shareholder's Equity/Net Capital 78% WACC 13.61% 14.27% 14.93%

26 Forecast-Most Likely Case
1985 1986 1987 Net Income -4.69 -4.74 -4.79 Cash Flows from Operation -5.23 -5.28 -5.34 Free Cash Flow to Equity -5.80 -5.90 Less: Dividends 4.65 Free Cash Flow after Dividends -10.45 -10.55

27 Forecast-Best Case Best Case 1985 1986 1987 Net Income 5.91 6.27 6.64
Cash Flows from Operation 1.41 1.50 1.59 Free Cash Flow to Equity 0.00 Less: Dividends 4.65 Free Cash Flow after Dividends -4.65

28 Takeover Risks Substantial borrowing capacity Low profitability
Current ratio:2.2 Debt/Equity ratio:0.86 Low profitability The stock price will be undervalued

29 Takeover Risks The asset was under valuated Land at old cost
Inventory recorded at LIFO, but should valuated at FIFO. LIFO reserve of 6.8 million Pension plan over funded (pg.239) Net asset: 47151 Less PV vested Lib: 27463 Less PV of non-vested Lib: 4496 Over funded:15192 (belong to the firm)

30 Valuation Valuation Best Most Likely Worst Book Value per Share 30.66
29.30 28.93 Abnormal Earning Method 18.20 6.80 6.20 Abnormal Returns Method 20.47 5.20 1.14 Discounted Cash Flow Method

31 Conclusion The strategy might not work on bicycle business because it takes time for the company to learn how to be a low cost producer. Un-optimistic view on ability to maintain stability future cash flows from operation Ability to maintain dividend structure is doubtful, decrease or elimination of dividends in the future is likely

32 Open Alternatives Alternatives for management to consider:
Secured distribution channels Outsource productivity Move plant to abroad Sell bicycle division

33 What Happened in the End?
Management stuck to its strategy to turn around the bicycle division The problems in the division persisted 1985. Dividends were cut by 50% Stock price floated around $21 till 1987 May 7, Electrolux AB of Sweden made an unfriendly takeover for $48 per share Murray resisted the offer June 22, Murray was acquired by Tomkins PLC for $52 per share

34 1985 – 1987 Performance In $ Millions Movers Bicycles Total 1985 1986
Sales 253 258 327 185 116 111 388 374 438 Operating profits 25 30 41 2 (3) (7) 27 34 Capital expenditure 7 4 3 1 11 10

35 Stock Performance 1985 1986 1987 Earnings per share 1.20 0.77 1.81
Dividends per share 0.75 0.60 Stock price – High 22.38 26.25 36.83 Stock price - Low 17.00 19.13 17.25 Book value per share 29.30 29.50 30.10

36 QUESTION?


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