Investment Analysis and Recommendation

Investment Analysis and Recommendation

� Investment Analysis and Recommendation Paper � continued

In this section the writer will read the annual report of the company been use for the paper and will use
the points listed below to complete this paper. The writer will respond under the headings in week 4 of the
investment analysis paper. The writer will follow the style of the template and will respond just according
to the subheadings on the template under week 4 and will stop where it says �week 4 stops hear�. The
writer will include all calculations if needed and will use the appendix sections of the paper as per APA

rules for using appendix in a paper. Remember this is a continues paper.

This week, you will read the text portion of your company’s annual report. As you do so, focus on the

following:

� Identify potential real options that might arrive in this firm’s business.
� Are these options industry specific or company specific?
� How would these options affect their capital budgeting process?

� Justify your answers.

Write up a 2-page summary of your findings, including any calculations you might have made, and relate

how you reached your conclusion.

The writer must pay attention to grammatical and sentence structure. the writer must use proper APA
rules as that is one of the most important aspect that is been graded in this paper. The writer must follow
the structure of the template that will be uploaded hear and respond according to the subheadings
including all calculations and proper use of the appendix and table, base on APA rules.

Investment Analysis Paper on Chesapeake Energy Corporation
Chesapeake Energy Corporation is US based utility company dealing in natural gas
exploration and production. The company is headquartered in Oklahoma City, OK and employs

approximately 10,800 people (as of December 31, 2013). The company was incorporated in 1947
and has evolved to be a leader in the energy sector worldwide with over $7.4 billion in total
assets (as of December 31, 2014).

Board of Directors

The board of directors is very important to the organization since they determine the
direction to be taken by the business. In Chesapeake Energy Corporation, the board of directors
is composed of a ten member team; nine of the ten are independent members. Each of the nine
sits in a charter committee namely; audit committee, compensation committee, nominating
committee and finance committee. The Chair to the Board is a member of nominating committee
and finance committee.
Monitoring Potential of the Firm’s Board of Director
The strategic monitoring potential of the board is derived from the fact that 90% of the
members have complete autonomy and sits on committees (MarketLine, 2014). The charter is
also governed by constituency statutes that permit them to make decisions in favor of the
company rather than the shareholders’ interests (Chesapeake Corp Annual report, 2014).
Strengths and Weaknesses of Board Structure
Intense market competition and structuring of the board might either erode or increase the
company’s market share. This board strength and weaknesses include (see Table 1):
Tables are presented inside the paper – where is your table. An appendix is at the back.
Ethical Concerns

The company lacks appropriate responsiveness to the shareholders concerns. This is
because the directors have full autonomy over decision making. Despite the fact that their
position is backed up by the constituency statutes, it amounts to lack of transparency in the
overall organization (Bundy & Ann, 2013).

Competitive Financial Ratio

Proper financial management is based on building upon the business strength while at the
same time striving to overcome the company challenges. Financial analysis is imperative in
determining the profitability of the business. Financial ratios are based on the notion that trends
and patterns always occur while doing business that can be quantified, interpreted, and used by
the management for decision making process (Brooks & Mukherjee, 2013). However, research
illustrate that competitive financial ratios as well as DuPont identity help determine the part of
the business that is performing and the part that is underperforming.
By using Chesapeake Energy Corporation, they can calculate the company Return on
Investment (ROI). This value can help us to determine the organization competitive position by
comparing the value with the ROE of Anadarko Petroleum Corporation. That is one of the
company’s competitors.

Chesapeake Corp
(CHK)

Year
2014

Year
2013

Year
2012
Net Income 1,917 724 -769
Revenue 20951 17506 12316
Assets 40,751 41,782 41,611
Equity 18,205 18,140 18,796

ROI Calculations
ROI for CEC in 2012 (See table 2)

=724,000/15,995,000
=0. 0453
ROE for CEC in 2013 (See table 2)
= $769,000/15,995,000
= 0. 0481
ROI= Net income/ Shareholders equity
ROI for CEC in 2014(See Table 2)

= $1,917,000/$16,903,000
ROI=5.438
ROI for APC in 2014 is (See Table 3)
= (1,750,000)/19,725,000
= -0.0887

When they compare the two figures above, it is quite evident that Chesapeake Energy
corporation (CEC) has a competitive advantage as compared to Anadarko Petroleum Corporation
whose ROI is a negative value. Therefore, this implies that CEC management can create value
for the shareholders (Berk et al., 2013).
DuPont Analysis for the companies for the past three years
Return on Investment (ROI) as indicated in research is one of the most important
company analysis tools, which is used to measure how well a company manages and creates

value for their shareholders. However, the values on the ROI can sometimes be misleading in
terms of real value and risks associated with a particular investment. The numbers in the ROI can
easily be misleading to financial analysis if the individual components of the ROI have not been
broken down to their individual components. In this regard, DuPont can bridge the gap created
by the ROE and provide a reliable measure of how the company creates value for its
shareholders(Mitchell, Mitchell, &Cai, 2013).DuPont is the financial analysis tool that enables
the breakdown of the ROE into its various individual components such as financial leverage,
asset turnover, and profit margin (Haskins, 2013). The following is the financial calculation of
DuPont of Chesapeake Energy Corporation, together with their competitor, Anadarko Petroleum
Corporation (APC) (Chesapeake Corp, 2015).
DuPont analysis is used to break down ROE in order to get a more detailed understanding
of the ROI and where the information is obtained from (Gitman & Zutter, 2014). In our case we
will calculate the DuPont analysis for Chesapeake Energy Corporation for the last three years in
order to understand the trend in the ROI
DuPont Analysis

    Year ROE Profit
Margin

Asset
Turnover

Equity
Multiplier

CEC
2014 10.50% 34% 51% 224%
2013 4% 35% 42% 230%
    2012 -4.30% 43% 30% 233%

In the year 2012;

The DuPont for Chesapeake Energy Corporation is given by (See Table 2)
Net Profit x Asset Turnover x Leverage Factor
(769,000/12,316,000) x (12,316,000/41,611,000) x (41,611,000/12,316,000)
= 0.0624 x 0.256 x 3.379 =0.054
The DuPont for Anadarko Petroleum Corporation (APC) is given by (See table 3)
(2,391,000/13,411,000) x (13,411,000/52,589,000) x (52,589,000/20,629,000) =
=0.1783 x 0.255 x 2.541 = 0.116
In the year 2013;
The DuPont for Chesapeake Energy Corporation is given by (See Table 2)
(724,000/17,506,000) x (17,506,000 / 41,782,000) x (41,782,000/15,995,000) =
0.041 x 0.419 x 2.612 = 0.045
The DuPont for Anadarko Petroleum Corporation (APC) is given by (See table 3)
(801,000/14,581,000) x (14,581,000/55,781,000) x (55,781,000/21,857,000) =
0.055 x 0.21 x 2.55 = 0.029
In the year 2014;
The DuPont for Chesapeake Energy Corporation is given by (See Table 2)
(1,917,000/20,951,000) x (20,951,000/40,751,000) x (40,751,000/16,903,000) =
0.091 x 0.514 x 2.411 = 0.113

The DuPont for Anadarko Petroleum Corporation (APC) is given by (See Table 3)
(1,750,000/18,470,000) x (18,470,000/61,689,000) x (61,689,000/19,725,000) =
0.095 x 0.299 x 3.127 = 0.089
Differences and trend that emerge
In the year 2012, the operating efficiency of APC (0.18) was higher than that of CEC
(0.06) as can be seen in their profit margins. In the same year, it can be deduced that the asset use
efficiency of between the two companies are almost the same since they stood at 0.255 for APC
and 0.256 for CEC. On the other hand, the financial leverage for CEC was higher (3.4) than the
financial leverage for APC (2.5).
In the year 2013, the operating efficiency of APC (0.05) was still higher than that of CEC
(0.04). In the same year, the asset use efficiency of CEC was higher than the asset use efficiency
of APC. Similarly, CEC had a higher financial leverage in the year 2013 than APC. Overall, it
can be deduced that CEC performed better than APC in the year 2013.
In the year 2014, the operating efficiency of APC (0.095) was higher than that of CEC
(0.091). However, the asset use efficiency of CEC stood higher (0.5) than that of APC (0.3). On
the other hand, APC had a higher financial leverage (3.1) than CEC (2.4) as can be deduced from
the financial calculations. The higher the financial leverage, the better a company is placed to
provide good value for its shareholders (Brian, Sandra, & Jennifer, 2013).
I’m assuming you did not have time to correct week 2 – so I’ll just jump to reviewing
week 3.

Dividend Growth Model

The dividend growth model helps in the in-depth understanding of equity by forecasting
business performance and selecting the appropriate valuation model. Return on investment is a
method that determines the efficiency of a company by dividing the returns and the cost of the
investment (Isiklar, 2005). Just as its name suggests, retention ratio refers to the percentage of
the net income that remains to grow the business after dividends have been paid. The price of
stock is the cost at which an investor needs to undergo in purchasing securities in the exchange
market. Earnings per share are the portion that indicates the company’s profitability as it
indicates the monetary value of earnings per outstanding share of the company’s stocks.
The financial information used in these calculations was drawn from the income
statement shown in Appendix A. Appendix B shows the dividend in stock for Chesapeake
Energy Corporation of the year 2014. After calculating the net income of the company of 2014,
the income is found to be $586,000 with an equity of 3. The total dividend of the company was
$207.80 in the year 2014 with an outstanding share of $665.14. The total earnings of the
company were $0.1952 in total. The dividends per shares that were offered by the company in
2014 were $2.32%, which is a good return to the company shareholders. The price of the
company’s stock in 2014 was recorded as $15.06, which is also good news for the company
shareholders. The calculations of the stock prices in relation to the ROI and retention ratio are
shown in Appendix C. The following are formulas that have been used in the analysis that was
carried out below:

Growth rate Chesapeake Energy Corporation 2014
     
ROE Net Income/Equity 10.50%
Retention Ratio 1-(cash dividends/net income)(659m *0.35/ NI) 0.88

Growth rate in earnings Retention rate X ROE 0.09237
Dividend Discount Model Return rate R = Dividend /price of stock + g 0.1208
Price of Stock Dividend/Return Rate R – Growth Rate g 14.07

Issues with Using the Growth Model

Growth model by Chesapeake Energy Corporation brings issues as it relies much of the
company growth rate model that assumes stable growth (Coe, 2002). This model demands that
the Chesapeake Energy Corporation company stock is hypersensitive to the entire growth
dividend rate that is provided that cannot exceed the cost of equity. The growth model brings
along the issue of not taking into account non dividend factors that are inclusive of brand loyalty
and customer retention in Chesapeake Energy Corporation.
Growth

The Reasonability of Constant Growth is tested through the use of discounted cash flow
that resides in the very heart of any valuation that the company is geared to use in its operations
(Gomes, 2010). The use of reasonability of constant growth ensures that understanding about any
given value of the most important perception is given in the right way ever for the benefit of the
company success. Therefore, it is necessary to assume a constant growth in the company.
The numbers arrived at using dividend growth model seen logical and feasible as can be
evidenced in the appendix. However, the use of dividend growth model seems complex and
cumbersome due to several calculations and steps involved. It is reasonable to assume a constant
growth in a company provided all the necessary requirements are taken into consideration.

References

Berk, J., DeMarzo, P., Harford, J., Ford, G., Mollica, V., & Finch, N. (2013).
Fundamentals of corporate finance, Pearson higher education au.
Brooks, R., & Mukherjee, A. K. (2013). Financial management: Core concepts. Pearson.
Cheasapeake Corp. (2015). Company Profile: Chesapeake Energy Corporation.
MarketLine