Relative Performance Analysis

Relative Performance Analysis

In the turbulent financial market of today, one may find a difficult time forming a portfolio that will facilitate a sustained return for the investor over time. There are several factors to take into account when constructing a portfolio and Team A choose 5 well-established stocks and 1 popular bond for its portfolio based upon past return and expected return in the future. After analyzing the several securities extensively, the team has gained valuable insight into the background of the stocks and bond. The team is confident to have added Proctor and Gamble, Time Warner, Home Depot, the Apollo Group, and the Goldman and Sachs bond to its portfolio and this paper will review each securities position and background of these blue chip stocks and bond in order to develop a superior portfolio that will provide a consistent return to the investor.

Proctor and Gamble

Procter and Gamble manufactures and distributes "branded products and services of superior quality and value that improve the lives of the world's consumers, now and for generations to come" (Procter and Gamble, 2007). Proctor and Gamble is in the personal products industry and has many branded products that are used around the world such as, Head and Shoulders, Tide, Pampers, Pantene, Mach3, Bounty, Oral-B, Braun, Folgers, Pringles, Charmin, Downy, Crest, Dawn and Gillette. Procter and Gamble currently has 135,000 employees spread over 80 countries worldwide. Although Proctor and Gamble has performed well during the past five years, one should review the 5-year return averages and compare them to other corporations before adding "PG" to a portfolio in order to analyze the prospective growth from the corporation and assess its profitability.

When Reviewing Proctor and Gamble's five-year return average, one can see a consistent return from year to year and within its industry, it is an industry leader. Proctor and Gamble has provided a steady return to its investor and the price of stock has risen from approximately $32 per share in November 2002 to nearly $73 in November 2007. This represents a substantial return on equity for the investor and during the previous 5 years, the average return was nearly 25% compared to the S&P 500 return of 20.3%. However, in the industry the average return was close to 49% during the same 5-year period. Some of Proctor and Gambles' competitors in the personal product industry would be Colgate-Palmolive (CL), Kimberly-Clark (KMB), and Avon (AVP). The five-year return average for Kimberly-Clark was 26.6%, and for Colgate-Palmolive it was 27.3%, and Avon's five-year return average was 143.7%. Clearly at first glance, one would have preferred to invest in Avon versus Proctor and Gamble just five years ago but Proctor and Gamble seems to be performing as expected in the industry. If one looks at Avon's current debt/equity ratio of 3.59 versus Proctor and Gamble's .53, one can see that PG is a more stable investment and AVP can possibly be volatile carrying large amounts of debt. Additionally, Proctor and Gamble had sales of $78 billion with a profit margin of 13.76% versus Avon's $9.5 billion in sales at a 6.2% profit margin. After reviewing Proctor and Gamble and the ratios versus the industry for the past five years, one can be confident in adding this firm to his or her portfolio.

Time Warner

"Time Warner Inc. is a leading media and entertainment company, whose businesses include interactive services, cable systems, filmed entertainment, television networks, and publishing" (Time Warner, 2007). As a leader in the entertainment industry, Time Warner has an enterprise of vast brands and uses constructive collaboration as a competitive advantage. Additionally, Time Warner has based the firm's continued success on using the following values as a foundation to build upon integrity, customer focus, teamwork, creativity, diversity, agility, and responsibility. The five-year return and key ratios for Time Warner and its comparison to other securities in the industry helps an investor to understand the long-term growth potential versus competitors.

Like many firms in the entertainment industry, Time Warner (TWX) has not had the best returns for its investors during the previous five years. However, many assert that the organization is improving its position but with competitors like Walt Disney (DIS), Comcast (CMCSA), and DirecTV (DTV) it can take some time to generate substantial return for its investors. The industry maintained a 2.8% average growth rate during the past 5 years and Time Warner managed to lose 8.3% annually for its investors during that same period. On a brighter note, TWX has generated a 7.9% return for its investors during the previous year while the industry has produced an average return of 11.3% during that same period. Of Time Warner's major competitors during the past 5 years, Walt Disney has an average return of 10.5%, Direct TV has .3% return, and Comcast has managed a 1.7% return for its shareholders. Of Time Warner's 3 major competitors, Disney appears to have produced the greatest results for its investors during the past 5 years. Walt Disney has annual sales of $35.5 billion with a profit margin of 13.6% which generated $4.67 billion in income for the organization during the previous fiscal year. Time Warner generated $46.3 billion in sales with a lower profit margin of 10.28% which made the company $4.76 billion in 2006. Both Disney and Time Warner have a low debt to equity ratio of .49 and .64 respectively. When reviews the quick ratio for the two organizations Disney has a .9 and Time Warner has .8, which is very similar and also Disney has a 2.3 leverage ratio and Time Warner has 2.0 which is also very similar which shows that most firms are financially stable and able to handle their debts. After reviewing the date for Time Warner, one can be confident that the company is trending upward after a sluggish few years in the industry and the security would be a good addition to the portfolio.

Wal-Mart

Wal-Mart is in the department and discount sector of the retail industry which "encompasses a broad range of operators, both traditional department stores and mass-market multi-retailers" (Reuters, 2007). The department and discount sector of the retail industry sees total revenues of over $444 billion with Wal-Mart contributing over 56 percent of the $444 billion. Wal-Mart sells a variety of merchandise from apparel to appliances. Looking at Wal-Mart's return on equity 5-yr. average, examining a few financial ratios and comparing the results to other companies within the industry, we can determine how Wal-Mart