INSTITUTE OF MANAGEMENT AND STUDIES

MBA (FA) SESSION (2018-2020)

ASSIGNMENT ON- Financial cases

1) Jetblue Airways IPO Valuation
2) The Financial detective

SUBMITTED BY :- SUBMITTED TO:-

Vaibhav Rajore Dr.M.K Arya
(SEC-B, 4TH SEM)
66520
Jetblue Airways IPO Valuation
It was April 11, 2002, barely two years since the first freshly painted JetBlue plane
had been rolled out at the company’s home base at New York City’s John F. Kennedy
Airport (JFK). JetBlue’s first years had been good ones. Despite the challenges facing
the U.S. airline industry following the terrorist attacks of September 2001, the company
remained profitable and was growing aggressively. To support JetBlue’s growth
trajectory and offset portfolio losses by its venture-capital investors, management was
ready to raise additional capital through a public equity offering. Exhibits 1 through 4
provide selections from JetBlue’s initial public offering (IPO) prospectus, required by
the SEC to inform investors about the details of the equity offering.
After nearly two weeks of road-show meetings with the investment community,
the JetBlue management team had just finished its final investor presentation and was
heading for Chicago’s Midway Airport. With representatives of co-lead manager
Morgan Stanley and the JetBlue board patched in on a conference call, it was time for
the group to come to an agreement on the offering price of the new shares. The initial
price range for JetBlue shares, communicated to potential investors, was $22 to
$24. Facing sizable excess demand for the 5.5 million shares planned for the IPO,
management
had recently filed an increase in the offering’s price range ($25 to $26). But
even at that price range, most of the group thought the stock faced “blow-out” demand.
After months of preparation, it was time to set the price. The underwriters were anxious
to distribute the shares that evening, and NASDAQ was prepared for JBLU (the
company’s ticker symbol) to begin trading on the exchange in the morning.

JetBlue Airways
In July 1999, David Neeleman, 39, announced his plan to launch a new airline that
would bring “humanity back to air travel.” Despite the fact that the U.S. airline industry
had witnessed 87 new-airline failures over the previous 20 years, Neeleman was
convinced that his commitment to innovation in people, policies, and technology could
keep his planes full and moving.1 His vision was shared by an impressive new management
team and a growing group of investors. David Barger, a former vice president
of Continental Airlines, had agreed to become JetBlue’s president and COO. John
Owen had left his position as executive vice president and former treasurer of Southwest
Airlines to become JetBlue’s CFO. Neeleman had received strong support for his
business plan from the venture-capital community. He had quickly raised $130 million
in funding from such high-profile firms as Weston Presidio Capital, Chase Capital Partners,
and Quantum Industrial Partners (George Soros’s private-equity firm).
In seven months, JetBlue had secured a small fleet of Airbus A320 aircraft and
initiated service from JFK to Fort Lauderdale, Florida, and Buffalo, New York. By
late summer of 2000, routes had been added to two other Florida cities (Orlando and
Tampa), two other northeastern cities (Rochester, New York, and Burlington,
Vermont), and two California cities (Oakland and Ontario). The company continued
to grow rapidly through early 2002, and was operating 24 aircraft flying 108 flights
per day to 17 destinations.
JetBlue’s early success was often attributed to Neeleman’s extensive experience
with airline start-ups. As a University of Utah student in his early 20s, Neeleman began
managing low-fare flights between Salt Lake City and Hawaii. His company, Morris
Air, became a pioneer in ticketless travel, and was later acquired by low-fare leader
Southwest Airlines. Neeleman stayed only briefly at Southwest, leaving to assist in the
launching of Canadian low-fare carrier West Jet while waiting out the term of his
“noncompete” agreement with Southwest. Simultaneously, Neeleman also developed
the e-ticketing system Open Skies, which was acquired by Hewlett-Packard in 1999.
Neeleman acknowledged that JetBlue’s strategy was built on the goal of fixing
everything that “sucked” about airline travel. He offered passengers a unique flying
experience by providing new aircraft, simple and low fares, leather seats, free LiveTV
at every seat, preassigned seating, reliable performance, and high-quality customer
service. JetBlue focused on point-to-point service to large metropolitan areas with
high average fares or highly traveled markets that were underserved. JetBlue’s operating
strategy had produced the lowest cost per available-seat-mile of any major U.S.
airline in 2001—6.98 cents versus an industry average of 10.08 cents.
With its strong capital base, JetBlue had acquired a fleet of new Airbus A320 aircraft.
JetBlue’s fleet not only was more reliable and fuel-efficient than other airlinefleets, but also
afforded greater economies of scale because the airline had only one
model of aircraft. JetBlue’s management believed in leveraging advanced technology.
For instance, all its pilots used laptop computers in the cockpit to calculate the weight
and balance of the aircraft and to access their manuals in electronic format during the
flight. JetBlue was the first U.S. airline to equip cockpits with bulletproof Kevlar doors
and security cameras in response to the September 11 hijackings.
JetBlue had made significant progress in establishing a strong brand by seeking to
be identified as a safe, reliable, low-fare airline that was highly focused on customer
service and by providing an enjoyable flying experience. JetBlue was well positioned
in New York, the nation’s largest travel market, with approximately 21 million potential
customers in the metropolitan area. Much of JetBlue’s customer-service strategy relied
on building strong employee morale through generous compensation and passionately
communicating the company’s vision to employees.
The Low-Fare Airlines
In 2002, the low-fare business model was gaining momentum in the U.S. airline industry.
Southwest Airlines, the pioneer in low-fare air travel, was the dominant player
among low-fare airlines. Southwest had successfully followed a strategy of highfrequency,
short-haul, point-to-point, low-cost service. Southwest flew more than
64 million passengers a year to 58 cities, making it the fourth-largest carrier in
America and in the world. Financially, Southwest had also been extremely successful—
in April 2002, Southwest’s market capitalization was larger than all other U.S. airlines
combined (Exhibits 5 and 6 provide financial data on Southwest Airlines).
Following the success of Southwest, a number of new low-fare airlines emerged.
These airlines adopted much of Southwest’s low-cost model, including flying to secondary
airports adjacent to major metropolitan areas and focusing on only a few types
of aircraft to minimize maintenance complexity. In addition to JetBlue, current lowfare
U.S. airlines included AirTran, America West, ATA, and Frontier. Alaska Air, an
established regional airline, was adopting a low-fare strategy. Many of the low-fare
airlines had been resilient in the aftermath of the September 11 attacks. (Exhibit 7
shows current market-multiple calculations for U.S. airlines.) Low-fare airlines had
also appeared in markets outside the United States, with Ryanair and easyJet in
Europe and WestJet in Canada. (Exhibit 8 provides historical growth rates of revenue
and equipment for low-fare airlines.)
The most recent IPOs among low-fare airlines were of non-U.S. carriers. Ryanair,
WestJet, and easyJet had gone public with trailing EBIT multiples of 8.5_, 11.6_,
and 13.4_, respectively, and first-day returns of 62%, 25%, and 11%, respectively.
The IPO Process
The process of “going public” (selling publicly traded equity for the first time) was
an arduous undertaking that usually required about three months. Exhibit 9 provides
a timeline for the typical IPO.3 A comment on the IPO process by JetBlue CFO John
Owen can be found at http://it.darden.virginia.edu/JetBlue/streaming_links.htm.
Private firms needed to fulfill a number of prerequisites before initiating the
equity-issuance process. Firms had to generate a credible business plan; gather a
qualified management team; create an outside board of directors; prepare audited
financial statements, performance measures, and projections; and develop relationships
with investment bankers, lawyers, and accountants. Frequently, firms held “bake-off”
meetings to discuss the equity-issuance process with various investment banks before
selecting a lead underwriter. Important characteristics of an underwriter included the
proposed compensation package, track record, analyst research support, distribution
capabilities, and aftermarket market-making support.
After the firm satisfied the prerequisites, the equity-issuance process began with
an organizational or “all-hands” meeting, which was attended by all the key participants,
including management, underwriters, accountants, and legal counsel for both the
underwriters and the issuing firm. The meeting was designed for planning the process
and reaching agreement on the specific terms. Throughout the process, additional meetings
could be called to discuss problems and review progress. Following the initiation
of the equity-issuance process, the Securities and Exchange Commission (SEC) prohibited
the company from publishing information outside the prospectus. The company
could continue established, normal advertising activities, but any increased publicity
designed to raise awareness of the company’s name, products, or geographical presence
in order to create a favorable attitude toward the company’s securities could be
considered illegal. This requirement was known as the “quiet period.”
The underwriter’s counsel generally prepared a “letter of intent,” which provided
most of the terms of the underwriting agreement but was not legally binding. The
underwriting agreement described the securities to be sold, set forth the rights and
obligations of the various parties, and established the underwriter’s compensation.
Because the underwriting agreement was not signed until the offering price was determined
( just before distribution began), both the firm and the underwriter were free to
pull out of the agreement anytime before the offering date. If the firm did withdraw
the offer, the letter of intent generally required the firm to reimburse the underwriter
for direct expenses.

The SEC required that firms selling equity in public markets solicit its approval.
The filing process called for preparation of the prospectus (Part I of the registration
statement), answers to specific questions, copies of the underwriting contract,
company charter and bylaws, and a specimen of the security (all included in Part II
of the registration statement), all of which required the full attention of all parties on
the offering firm’s team. One of the important features of the registration process was
the performance of “due-diligence” procedures. Due diligence referred to the process
of providing reasonable grounds that there was nothing in the registration statement
that was significantly untrue or misleading, and was motivated by the liability of all
parties to the registration statement for any material misstatements or omissions.
Due-diligence procedures involved such things as reviewing company documents,
contracts, and tax returns; visiting company offices and facilities; soliciting “comfort
letters” from company auditors; and interviewing company and industry personnel.
During this period, the lead underwriter began to form the underwriting “syndicate,”
which comprised a number of investment banks that agreed to buy portions of
the offering at the offer price less the underwriting discount. In addition to the
syndicate members, dealers were enlisted to sell a certain number of shares on a “best
efforts”
basis. The dealers received a fixed reallowance, or concession, for each share
sold. The selling agreement provided the contract among members of the syndicate.
The agreement granted power of attorney to the lead underwriter, and stipulated the
management fee that each syndicate member was required to pay the lead underwriter,
the share allocations, and the dealer reallowances or concessions. Because the exact
terms of the agreement were not specified until approximately 48 hours before selling
began, the agreement did not become binding until just before the offering. The
original contract specified a range of expected compensation levels. The selling agreement
was structured so that the contract became binding when it was orally approved
via telephone by the syndicate members after the effective date.

The SEC review process started when the registration statement was filed and the
statement was assigned to a branch chief of the Division of Corporate Finance. As
part of the SEC review, the statement was given to accountants, attorneys, analysts,
and industry specialists. The SEC review process was laid out in the Securities Act
of 1933, which aspired to “provide full and fair disclosure of the character of securities
sold in interstate commerce.”4 Under the Securities Act, the registration statement
became effective 20 days after the filing date. If, however, the SEC found anything
in the registration statement that was regarded as materially untrue, incomplete,
or misleading, the branch chief sent the registrant a “letter of comment” detailing the
deficiencies. Following a letter of comment, the issuing firm was required to correct
and return the amended statement to the SEC. Unless an acceleration was granted by
the SEC, the amended statement restarted the 20-day waiting period.
While the SEC was reviewing the registration statement, the underwriter was
engaged in “book-building” activities, which involved surveying potential investors to
construct a schedule of investor demand for the new issue. To generate investor interest,
the preliminary offering prospectus, or “red herring” (so called because the
prospectus was required to have “Preliminary Prospectus” on the cover in red ink),
was printed and offered to potential investors. Underwriters generally organized a oneor
two-week “road-show” tour during this period. The road shows allowed managersto discuss
their investment plans, display their management potential, and answer
questions from financial analysts, brokers, and institutional investors in locations
across the country or abroad. Finally, companies could place “tombstone ads” in
various financial periodicals announcing the offering and listing the members of the
underwriting syndicate.

By the time the registration statement was ready to become effective, the underwriter
and the offering firm’s management negotiated the final offering price and the
underwriting discount. The negotiated price depended on perceived investor demand
and current market conditions (e.g., price multiples of comparable companies, previous
offering experience of industry peers). Once the underwriter and the management
agreed on the offering price and discount, the underwriting agreement was signed,
and the final registration amendment was filed with the SEC. The company and the
underwriter generally asked the SEC to accelerate the final pricing amendment, which
was usually granted immediately over the telephone. The offering was now ready for
public sale. The final pricing and acceleration of the registration statement typically
happened within a few hours.

During the morning of the effective day, the lead underwriter confirmed the
selling agreement with the members of the syndicate. Following confirmation of the
selling agreement, selling began. Members of the syndicate sold shares of the offering
through oral solicitations to potential investors. Because investors were required to
receive a final copy of the prospectus with the confirmation of sale and the law
allowed investors to back out of purchase orders upon receipt of the final prospectus,
the offering sale was not realized until underwriters actually received payment.
Underwriters
would generally cancel orders if payment was not received within five days
of the confirmation.

SEC Rule 10b-7 permitted underwriters to engage in price-stabilization activities

for a limited period during security distribution. Under this rule, underwriters often
posted stabilizing bids at or below the offer price, which provided some price stability
during the initial trading of an IPO.

The offering settlement, or closing, occurred seven to ten days after the effective
date, as specified in the underwriting agreement. At this meeting, the firm delivered
the security certificates to the underwriters and dealers, and the lead underwriter delivered
the prescribed proceeds to the firm. In addition, the firm traditionally delivered
an updated comfort letter from its independent accountants. Following the offering,
the underwriter generally continued to provide valuable investment-banking services
by distributing research literature and acting as a market maker for the company.
The IPO Decision
There was some debate among the JetBlue management team regarding the appropriate
pricing policy for the IPO shares. Morgan Stanley reported that the deal was
highly oversubscribed by investors (i.e., demand exceeded supply). Analysts and
reporters were overwhelmingly enthusiastic about the offering. (Exhibit 10 contains
a selection of recent comments by analysts and reporters.) Given such strong demand,
some members of the group worried that the current pricing range still left too muchmoney
on the table. Moreover, they believed that raising the price would send a strong
signal of confidence to the market.

The contrasting view held that increasing the price might compromise the success
of the deal. In management’s view, a successful offering entailed not only raising the
short-term capital needs, but also maintaining access to future capital and providing
positive returns to the crew members (employees) and others involved in directed IPO
share purchases. Because maintaining access to capital markets was considered vital
to JetBlue’s aggressive growth plans, discounting the company’s IPO price seemed
like a reasonable concession to ensure a successful deal and generate a certain level
of investor buzz. Being conservative on the offer price seemed particularly prudent
considering the risks of taking an infant New York airline public just six months after
9/11. (Exhibit 11 provides forecasts of expected aggregate industry growth and
profitability; Exhibit 12 shows the share-price performance of airlines over the past
eight months.)

By April 2002, the U.S. economy had been stalled for nearly two years. The
Federal Reserve had attempted to stimulate economic activity by reducing interest
rates to their lowest level in a generation. Current long-term U.S. Treasuries traded at
a yield of 5%, short-term rates were at 2%, and the market risk premium was
estimated to be 5%.
Based on the JetBlue management team’s forecast of aircraft acquisitions, Exhibit 13
provides a financial forecast for the company.
SUMMARY
JetBlue is an aggressive start-up, which began service in February 2000, and hasgrown
steadily since its inception. Duplicating Southwest’s simplicity, highaircraft utilization and
low fares, JetBlue offers comfortable, affordable andconvenient point-to-point air travel
with some unique amenities (for example,leather seats and live-feed TV monitors). It has
relied primarily on word ofmouth advertising to execute its strategy. In contrast with most
upstartdiscount carriers, JetBlue operates a fleet of 31 brand new, highly fuel-efficientAirbus
A320 aircraft and employs a non-unionized FAA certified workforce(pilots, technicians,
dispatchers) The management team has an extensiveleadership track record with successful
carriers, such as Southwest Airlines.This report examines the April 2002, decision of JetBlue
management to pricethe initial public offering of JetBlue, just months after the terrorist
attacks of 2001. Although the timing seemed risky, John Owen,Executive vice president and
chief financial officer of JetBlue Airways stated “the market is never dead for a good
company with real revenues and real earnings”. JetBlue had managed to remain profitable
and grow aggressively despite the challenges facing the airline industry.Calculating an
Appropriate Pricing Policy RangeThe lead underwriter for the JetBlue I.P.O. Morgan Stanley
had initiallycalculated a price per share of $22 to $24. However, with sizeable excessdemand
for the 5.5 million shares being offered; they had adjusted the rangeupwards ($25 to
$26).This report utilized four different share valuation methods: 1) Price/earningsmultiple
(comparison pricing); 2) Total capital multiple (comparison pricing);3) EBIT multiple
(comparison pricing); and 4) Discounted free cash flows(fundamentals pricing). We conclude
that the JetBlue offering price should be$27 to $29.Correct Valuation Leaves Money on the
Table According to economist Kevin Rock (Rock, 1986), because informed investors do not
exist in sufficient number, underwriters re-price I.P.O offerings to bring in uninformed
investors and ensure that they maximize total bidding. This theory has empirical support in
papers that have found that when investment banks can allocate shares in greater measure
to informed investors, the underpricing is reduced since the compensation needed to draw
uninformed investors is lower. (Davidoff, 2011). Underpricing has also been found to be
lower when information about the issuer is more freely available so that uninformed
investors are at less of a disadvantage. Underpricing gives uninformed investors normal
return. In countries where share allocation is transparent (Singapore and Finland), investors
receive more shares of overpriced offerings making average profits zero. (Keloharju,
1993).JetBlue is only offering approximately ten percent of the firm’s outstanding shares; a
successful I.P.O. will help to not only raise short-term capital, but also provide access to
future capital. Increasing the share price aggressively will dampen demand and reduce the
publicity buzz surrounding the event and the company. In line with the benefits of
underpricing we agree with a more conservative pricing range as suggested by the Morgan
Stanley underwriters.
Is the I.P.O Worth the Expense?
A good valuation of the I.P.O. share offering will leave money on the table. In addition to
that loss, JetBlue will have to pay legal, accounting, and underwriting fees associated with
public offerings. Is it worth it?
From an operation perspective, the I.P.O. supplies capital to JetBlue which the firm can use
to increase competitiveness and support aggressive growth. From a financing perspective,
JetBlue investors will gain access to a more liquid equity market which will reduce JetBlue’s
cost of capital from the much higher cost of private equity. Additionally, the new equity will
lower the debt to equity ratio. With a lower debt to equity ratio, JetBlue will then have
increased access to the debt market with more favorable terms. The ability to access more
debt can then be used to again decrease the cost of capital by altering the capital structure
of JetBlue to take advantage of the tax advantages provided by debt financing. The tax
shield of the debt financing will increase the enterprise value of the company.

Comparable Companies Analysis

P/E Multiple
Using the leading P/E multiple method of valuation is standard practice in the airline
industry (Yale School of Management, 2002). However, in our analysis (figure 1) the
comparison sample size had to be reduced to include only low-cost airlines with positive
earnings which limited the scope of the relative values. Due to the small sample size, the
average P/E ratio was skewed high towards Frontier’s outlying performance.
Therefore we determined that the median P/E ratio of comparable companies provided a
more accurate figure. With predicted earnings per share in 2002 of $1.20, JetBlue’s price per
share would be $34.12. Underpricing gives uninformed investors normal return.
However, using trailing indicators we calculated the current share price to be substantially
lower at $28.84. The wide variance is due to: 1) Increased price earnings ratios in 2002 for
low-cost carriers; and 2) Increased earnings per share for JetBlue. The range is made wider
when using the average P/E multiple from the sample group: $28.46 to $37.28.
Total Capital Multiple
The total capital multiple company comparison (figure 2) utilized published figures from all
low-cost carrierairlines; the sample size for this comparison was the largest of the
comparable companies’ analysis methods.While the total capital multiple uses trailing
indicators, the multiple is the least subject to accountingpractice variances; debt and equity
accounting have fewer GAAP methods of calculation.

Again, the median figure was most representative of the sample (as it disregarded unusual
outlying high andlow performers), and provided a valuation of $27.50 for JetBlue. This
valuation is slightly below the rangeof the leading and trailing values generated by the P/E
multiple ($28 to $34). The valuation estimate dropsto $24.93 per share when using the
average total capital multiple from the sample group. However, themedian figure is still
conservative as it is below the 2.88 multiple of Southwest. Southwest provides theclosest
proxy to JetBlue, because JetBlue duplicated Southwest’s operational practices in the
unclaimedNew York hub market.

EBIT Multiple
The EBIT multiples (figure 3) provide a useful comparison with low-cost airline carriers with
differentcapital structures. However, the EBIT multiple had the widest range between
trailing and leadingestimates; and the widest range between the EBIT multiple average and
median. For these calculations, theaverage of the sample represented JetBlue most closely.

Similar to the P/E multiple, the large gap between the trailing and leading estimate is mainly
due toJetBlue’s large jump in EBIT for 2002 (over 100 percent). JetBlue’s increase in EBIT is
magnified by thesample’s increase in the EBIT multiple. The trailing multiple valuation
provides a conservative $16.48 pershare ($9.87 per share when using sample median
multiple). However, the leading valuation is in line withthe other multiples at $29.08 per
share ($19.54 per share when using the median multiple).

Discounted Cash Flow Analysis

Assumptions
We have used the following assumptions supplied by the JetBlue management forecast and the
case-writeranalysis provided in Exhibit 13 (Bruner, Eades, &Schill, 2010):

1. The Revenue per aircraft will commence at $17 million per aircraft and increase by 4 percent
peryear (inflation) going forward from 2003-2009 since the airline is at the height of the industry
interms of load factors. This estimate will drive the revenue growth rates in the DCF model.

2. Operating expenses are projected as a percentage of revenues.

3. Capital expenditures estimates are based on information presented in JetBlue’s I.P.O.
prospectusand adjusted upwards for inflation of 5 percent per year.

4. The debt-to-equity ratio is estimated using the Total Capital Multiple estimate (figure 2).5. The
risk-free rate and market premium are as of April 2002

6. Corporate income tax rate remains flat at the 2002 level of 34 percent.

7. A terminal growth rate of 4.5 percent, which is a reasonable estimate of GDP growth, based
onofficial estimates. (Bureau of Labor Statistics projection for GDP by 2005 plus inflation)

8. The levered beta for the Airline Industry is 1.08 (Yale School of Management, 2002); however
wechose the higher levered beta of Southwest (1.10) as the best representation of low-cost carriers’

levered beta (figure 4).

Weighted Average Cost of Capital

Using the market value capital structure estimate from the total capital multiple (figure 2),
we calculatedthe weighted average cost of capital for JetBlue to be 9.22 percent (figure 5).
Discounted Cash Flow Share Price Valuation
The resulting share price from the discounted cash flow analysis (figures 6 and 7) is $29.89.
This figure iswithin the P/E multiple valuation range (the industry’s standard practice for
valuation) of $28 to $34. Thediscounted cash flow analysis price per share is slightly higher
than the total capital and EBIT multiples. Wesubjected the DCF price per share to a
sensitivity analysis (figure 8) to calculate the effect of a change ingrowth and a change in the
weighted average cost of capital. An adjustment of 0.5 percent to either theWACC or the
terminal growth rate resulted in changes to the share price estimate of 20 to 30 percent.
Theeffect of the WACC rate on JetBlue’s share price highlights the value of the I.P.O. to
JetBlue. The I.P.O.will reduce the cost of equity (by introducing liquidity to private equity
holders); additionally the improveddebt-to-equity ratio will provide JetBlue with increased
access to the debt markets. With a carefullycalculated capital adjustment, JetBlue can
further decrease its weighted cost of capital by using the taxshield benefits of capital debt
and the lower cost of debt.
JetBlue Airways IPO Valuation
From the analysis of the company comparison multiples and the discounted cash flows, we
conclude that theJetBlue Airways I.P.O. should have a share price within the range of $27 to
$29. This range is below theprice per share of all leading multiples estimates and is below
the DCF estimate. The range captures themore conservative trailing estimate of the Total
Capital multiple estimate. To accommodate the benefits ofunderpricing (access to future
capital; generating goodwill and publicity; enticing uninformed investors),we therefore
suggest the conservative range of $27 to $29. The current suggested price of $25 to
$26unnecessarily leaves too much money on the table.

SWOC Analysis
Strengths
• The first strength of JetBlue is its founding team’s background. Indeed, the company
was founded by a veteran in the low-fare airline industry, backed by a group of
private equity firms. The management of the company has also the expertise of
leading a publicly held company, following the IPO in 2002.
 • The company has a successful business model and exhibits strong financial results, as
well as strong revenue growth despite the downturn in the industry following the
terrorist attacks of September 11, 2001. Thus, JetBlue is a perceived as a solid and
growing company by the investors.
• The low operation costs of JetBlue are one of the most important strengths of the
company. The company is utilizing aircraft efficiently generating more revenue per
plane. The company is also operating one type of aircraft, the Airbus A320, thus
lowering maintenance and training costs and spare parts needs.
• The workforce of JetBlue is non-unionized and does not benefit from strict work
regulations.
• The distribution costs of JetBlue are also low. Indeed, the company does not provide
any paper tickets.
• The company operates only new airplanes, thus minimizing maintenance costs and
offering a good “flying experience” to its customers. The company also benefits from
its reliable on-time performance, comfortable airplanes, and friendly flying
personnel to attract and secure its customer base.
• The company serves densely populated cities in underserved airports, with high
fares. This strategy helps the company capture market share in these segments.
• The company is financing its existing aircraft through secured debt and operating
leases, on favorable terms. Those financing possibilities are still available for the
company for additional aircraft purchase.

Weaknesses

• A considerable weakness of JetBlue is its small size. The company is operating 42

aircraft, for 73 flights per day and annual revenues of $635 million.
• The company can probably not rely on its personnel loyalty, due to the non-
advantageous working conditions and regulation.
• The company is operating only one type of airplane, the Airbus A320. This represents
a weakness for the company as well. Indeed, the planes have the same age and
might all suffer at the same time from an eventual recurrent technical problem on
this type of aircraft, which should be catastrophic for the company.
• JetBlue does not have a line of credit, or short-term borrowing facility. Therefore,
the company depends on its operating cash flow to finance its short-term and
working capital obligations. The balance sheet of the company also needs to be
strengthened.
• JetBlue also faces one of the airline’s principal risks which is the rising fuel price. The
company is spending a considerable amount of money in hedging for fuel prices
volatility. In addition, as the company is relatively consuming low volumes of fuel, it
can suffer from significantly higher prices in case of fuel shortage.
• JetBlue is a levered company. With a short-term debt of $26,580 thousand and a
long-term debt of $731,740 thousand as by June 2003, and equity of $480,594
thousand, the company’s leverage ratio is 157.8%, whereas the industry average is
around 129.46% (Infinancials).

Opportunities
Internal

• The purchase of the new 100-seat Embraer E190 aircraft would allow JetBlue to
enter smaller markets while maintaining low operating costs, and increase flight
frequency on existing routes.
• The private placement of convertible debt proposed by JetBlue’s investment bankers
would provide sufficient capital at relatively low interest rates.
• JetBlue is a fast growing company, and should thus bear having less debt. The
company has thus the opportunity to raise additional equity.

External

• The low fares offered by JetBlue would allow it to attract new passengers who might
otherwise not fly.
• The mid-sized market that JetBlue intends to enter will represent a new opportunity
for growth to the company.
• By expanding its activities, the company will purchase larger volumes of jet fuel and
would thus have more leverage in procuring fuel than today. The company will thus
suffer relatively less from fuel shortages.

Challenges

Internal

• The company is intending to grow and become an airline company “like the others”.
JetBlue might thus lose its advantages from being low-cost, small and highly
profitable.
• The company is clearly departing from its strategy, which has been the source of its
strengths up to 2003.
• JetBlue plans to purchase a new type of aircraft, the Embraer E190. This is again a
departure from the company’s initial strategy which is to operate only one type of
aircraft. JetBlue might thus incur higher maintenance and training costs, higher spare
parts and engines costs, and some negative impact on the maintenance scheduling.
• JetBlue plans to increase its aircraft fleet from 45 to 252. In addition, the company
plans to invest in other domains such as spare parts, new engines, additional hangars
and a flight training center. This represents a very big investment and thus a
consequent threat for the company. Such an investment will let the company more
exposed to financial distress and raises the question of the management ability to
cope with such a rapid expansion.
• The company board members are very concerned about dilution. There is a threat
that they will not support John Owen, the CFO, if he recommends to raise new
equity capital.
• With the rapid expansion of the company, the jet fuel expenses, as well as the cost
of their hedging will grow rapidly. The company will be more exposed to both the
fuel price volatility and the growing cost of hedging it.
• As the company will get bigger, with higher manpower, those might want to be
unionized.
External

• The fuel price is also an external factor due to its non-predictable volatility.
• JetBlue plans to be the launch customer for the new Embraer E190 aircraft. Although
this allowed probably the company to have a price discount, it is also a threat.
JetBlue might be exposed to technical and/or non-technical problems that have been
not detected by the manufacturer or other users of the jet.
• The reason for the company to go public was to wean off its dependence on the
venture capital and private equity industries. Issuing private debt securities
represent a threat for JetBlue as this might lock back the company to such private
investors. In addition, those investors and the private investors in general might not
be interested by the eventual convertible debenture issued by the company.
• JetBlue is a small client of Morgan Stanley, the investment bank in charge of
proposing financing alternatives for the company. Morgan Stanley might thus charge
heavily JetBlue, and/or try to bias the company’s choice for its benefit.
• The competition from other low-cost and regular airline companies which might try
to counter JetBlue’s expansion.
• The revenues of the company and its growth aspirations are subject to the economic
conditions. An economic downturn or additional terrorist attacks might impact
negatively JetBlue’s ability to finance its debt obligations.
• The company will also have to secure additional airport gates which will represent a
threat for the company in case it cannot negotiate advantageous conditions as with
underserved airports.
 CASE
STUDY- 2
The Financial Detective, 2005
Financial characteristics of companies vary for many reasons. The two most
prominentdrivers are industry economics and firm strategy.Each industry has a
financial norm around which companies within the industrytend to operate. An airline,
for example, would naturally be expected to have a highproportion of fixed assets
(airplanes), while a consulting firm would not. A steelmanufacturer would be
expected to have a lower gross margin than a pharmaceuticalmanufacturer because
commodities such as steel are subject to strong price competition,while highly
differentiated products like patented drugs enjoy much more pricingfreedom.
Because of unique economic features of each industry, average financial
statements will vary from one industry to the next.

Similarly, companies within industries have different financial characteristics, in

part, because of the diverse strategies that can be employed. Executives choose
strategiesthat will position their company favorably in the competitive jockeying
within anindustry. Strategies typically entail making important choices in how a
product ismade (e.g., capital intensive versus labor intensive), how it is marketed
(e.g., directsales versus the use of distributors), and how the company is financed
(e.g., the useof debt or equity). Strategies among companies in the same industry
can differ dramatically.
Different strategies can produce striking differences in financial results for
firms in the same industry.

The following paragraphs describe pairs of participants in a number of different

industries. Their strategies and market niches provide clues as to the financial
conditionand performance that one would expect of them. The companies’ common-
sized financialstatements and operating data, as of early 2005, are presented in a
standardized formatin Exhibit 1. It is up to you to match the financial data with the
company descriptions.Also, try to explain the differences in financial results across
industries.

Health Products
Companies A and B manufacture and market health-care products. One firm is the
world’s largest prescription-pharmaceutical company. This firm has a very broad and
deep pipeline of ethical pharmaceuticals, supported by a robust research and
developmentbudget. In recent years, the company has divested several of its
nonpharmaceuticalbusinesses, and it has come to be seen as the partner of choice
for licensingdeals with other pharmaceutical and biotechnology firms.
The other company is a diversified health-products company that manufactures
and mass markets a broad line of prescription pharmaceuticals, over-the-counter
remedies(i.e., nonprescription drugs), consumer health and beauty products, and
medicaldiagnostics and devices. For its consumer segment, brand development and
managementare a major element of this firm’s mass-market-oriented strategy.

Beer
Of the beer companies, C and D, one is a national brewer of mass-market consumer
beers sold under a variety of brand names. This company operates an extensive
networkof breweries and distribution systems. The firm also owns a number of beer-
relatedbusinesses, such as snack and aluminum-container manufacturing, and
several majortheme parks.
The other company produces seasonal and year-round beers with smaller
productionvolume and higher prices. This company outsources most of its brewing
activity.The firm is financially conservative, and has recently undergone a major cost-
savingsinitiative to counterbalance the recent surge in packaging and freight costs.

Computers
Companies E and F sell computers and related equipment. One company focuses
exclusively on mail-order sales of built-to-order PCs, including desktops, laptops,
notebooks, servers, workstations, printers, and handheld devices. The company is
anassembler of PC components manufactured by its suppliers. The company allows
itscustomers to design, price, and purchase through its Web site.
The other company sells a highly differentiable line of computers, consumeroriented
electronic devices, and a variety of proprietary software products. Led by its
charismatic founder, the company has begun to recover from a dramatic decline in
itsmarket share. The firm has an aggressive retail strategy intended to drive traffic
through its stores and to expand its installed base of customers by showcasing its
products in a user-friendly retail atmosphere.

Books and Music

The book and music retailers are companies G and H. One focuses on selling
primarilyto customers through a vast retail-store presence. The company is the
leaderin traditional book retailing, which it fosters through its “community store”
concept120 Part Two Financial Analysis and Forecasting
and regular discount policy. The firm also maintains an online presence and owns a
publishing imprint.The other company sells books, music, and videos solely through
its Internet Website. While more than three-quarters of its sales are media, it also
sells electronics andother general merchandise. The firm has only recently become
profitable, and it hasfollowed an aggressive strategy of acquiring related online
businesses in recent years.

Paper Products
Companies I and J are both paper manufacturers. One company is the world’s
largestmaker of paper, paperboard, and packaging. This vertically integrated
company ownstimberland; numerous lumber, paper, paperboard, and packing-
products facilities; anda paper-distribution network. The company has spent the last
few years rationalizingcapacity by closing inefficient mills, implementing cost-
containment initiatives, andselling nonessential assets.
The other firm is a small producer of printing, writing, and technical specialty
papers, as well as towel and tissue products. Most of the company’s products are
marketedunder branded labels. The company purchases the wood fiber used in its
papermakingprocess on the open market.

Hardware and Tools

Companies K and L manufacture and sell hardware and tools. One of the companies
is a global manufacturer and marketer of power tools and power-tool accessories,
hardware and home-improvement products, and fastening systems. The firm sells
primarilyto retailers, wholesalers, and distributors. Its products appear under a
varietyof well-known brand names and are geared for the end user.
The other tool company manufactures and markets high-quality precision tools
and diagnostic-equipment systems for professional users. The firm offers a broad
range of products, which it sells via its own technical representatives and mobile
franchisedealers. The company also provides financing for franchisees and for
customers’large purchases.

Retailing
Companies M and N are two large discount retailers. One firm carries a wide variety
of nationally advertised general merchandise. The company is known for its low
prices, breadth of merchandise, and volume-oriented strategy. Most of its stores are
leased and are located near the company’s expanding network of distribution
centers.The company has begun to implement plans to expand both internationally
and inlarge urban areas.The other firm is a rapidly growing chain of upscale discount
stores. The companycompetes by attempting to match other discounters’ prices on
similar merchandise andby offering deep discounts on its differentiated items.
Additionally, the company haspartnerships with several leading designers. Recently,
the firm has divested severalCase 7 The Financial Detective, 2005 121
nondiscount department-store businesses. To support sales and earnings growth,
thiscompany offers credit to qualified customers.

Newspapers
Companies O and P own newspapers. One is a diversified media company that
generates most of its revenues through newspapers sold around the country and
aroundthe world. Because the company is centered largely on one product, it has
strongcentral controls. Competition for subscribers and advertising revenues in this
firm’ssegment is fierce. The company has also recently built a large office building
for itsheadquarters.
The other firm owns a number of newspapers in relatively small communities
throughout the Midwest and the Southwest. Some analysts view this firm as holding
a portfolio of small local monopolies in newspaper publishing. This company has a
significant amount of goodwill on its balance sheet, stemming from acquisitions. Key
to this firm’s operating success is a strategy of decentralized decision making and
administration.
Synopsis and Objectives

Comparisons among industries

This case is primarily about the effects of managerial strategy on financial ratios, but it also
affords several insights about the effect of industry differences on financial ratios. For
instance, differences in asset intensity can produce dramatically different asset structures
(for example,compare the percentages of inventory and net property, plant, and
equipment [PP&E] for paperproducts with computers). The rate of technological
change can manifest itself in several ways including the reinvestment rate required
to stay competitive (for example, compare dividendpayoutratios for newspapers, and
books and music). Industry structure is believed to affect theprofitability through the
pricing power of the firm. The newspaper industry can be characterizedas locally
oligopolistic (in some areas, however, monopolistic); the discount retail industry
ismuch more competitive in structure. The gross profit margins of the two industries
differsubstantially.The general insight for students must be that, in conducting the
financial analysis of a firm,one must understand the nature of the industry.

Comparisons of pairs of companies within industries

Table TN1 and Exhibit TN1 summarize the identities of the 16 firms. I usually
withhold
the identities until the conclusion of the class period so that students will reason from
the financialdata, rather than from other knowledge that they may have about those
companies. Table TN1also highlights the industry pairs that have proven to be
relatively easier and harder1 for thestudents to sort out.
Health products: companies A and B

Company A is Johnson & Johnson (J&J): a diversified manufacturer of

prescription
pharmaceuticals, over-the-counter drugs, health and beauty aids, and medical
devices. Company B is Pfizer Inc., which develops, manufactures, and markets
patented pharmaceuticals such asLipitor (for high cholesterol) and Celebrex (for
arthritis pain). The most significant strategicdifferences between those firms lie in
their product mix and their customer focus: J&J sells manyof its products directly to
consumers while Pfizer sells almost exclusively to institutions anddoctors.
Intangibles percentage: Firm B shows a proportion of intangibles nearly twice as
large asfirm A, which may reflect firm B’s higher investment in research and
development. Firm B mayalso have higher intangibles from its ownership of patents
and its investments in licensingarrangements.

Gross margin: Company B’s gross margin is more than 12% higher than company
A’s,which reflects the higher input costs for company A’s medical diagnostics and
devices productsegment, as well as the higher prices that company B can charge on
ethical prescriptionpharmaceuticals.
Inventory turnover: Company A turns over its inventories far more quickly than
companyB. Company A markets its consumer products to retailers, which have high-
turnover orientations,while company B sells almost exclusively to institutions and
pharmacies, which may take longer toexhaust their supplies.

Net profit margin: Many of company A’s products are branded consumer products
thatcommand a price premium. Company B’s patented products also command a
price premium.Company B’s premium is higher than company A’s, reflecting the
benefits of patent protection onprescription pharmaceuticals, and the additional
returns needed to support company B’s largeresearch and development (R&D)
efforts.

Beer: companies C and D

Company C is Anheuser-Busch Companies Inc.: a producer and marketer of a

numberof mass-market beers such as Budweiser, Michelob, and Busch. Company
D is The Boston BeerCompany, the seller of the popular Sam Adams line of beers.
Boston Beer’s products are part ofa category of niche beers called “microbrews.”

Cash & short-term investments percentage: Company D’s extraordinarily higher

proportion of cash and cash equivalents illustrates the firm’s highly conservative
approach to itsfinancial management.

Net fixed assets: Company C shows a relatively high level of property, plant, and
equipment (PP&E), which is consistent with its status as a major brewery. Company
D has muchlower net fixed assets since much of N’s brewing operation is
outsourced. Company C’s higherfixed assets are also due to its other holdings such
as theme parks.

Gross profit versus net profit: Company D has higher gross profit, consistent with the
premium pricing of its specialty brews versus the mass-marketing approach that was
taken bycompany C. Conversely, company C’s net profit margin is almost three
times greater thancompany D’s. This may reflect the economies of scale that
company C can achieve through itslarge size, relative to company D.

Current ratio: Company D’s current assets to current liabilities ratio is three times
greaterthan company C’s, whose current ratio is less than one, illustrating a careful
financial approach.

Debt to assets and equity: Again, the relatively low level of debt may demonstrate
thecompany’s commitment to financially conservative policies. (An alternative
explanation is that, asa younger firm, company D has had less access to debt
financing than would a more maturecompany.)

Inventory turnover: Consistent with company C’s mass-market approach, C’s

inventoryturnover is significantly higher than D’s turnover.
Asset turnover: Due to the relatively low level of assets required (because of
outsourcing),company D’s asset turnover is much higher. C’s lower turnover is
consistent with a firm that ownsits manufacturing facilities as well as asset-intensive
theme parks.
Computers: companies E and F

Company E is Dell, Inc.: a worldwide manufacturer and direct marketer of built-to-

ordercomputers and related equipment. Company F is Apple Computer, Inc., a
manufacturer of ahighly differentiated group of personal computers, software, and
consumer electronics. Theessential differences that motivate our conclusions here
are in the price and volume goals of eachcompany. Company E seeks to sell a
relatively high volume of lower-margin products, whilecompany F attempts to sell an
adequate volume of higher margin products.

Cash and short-term investments percentage: The computer and software industry is
notoriously volatile. Company F, led by its charismatic founder, has recently
emerged from aparticularly turbulent period, which could have resulted in the firm’s
demise. Therefore, companyF’s extremely large holdings of cash and cash
equivalents may represent the company’s efforts toinsure itself against any future
difficulties

Accounts payable percentage: Company E, an assembler of built-to-order

computers, has.a high percentage of accounts payable, which may reflect a higher
degree of supplier financing.

Cost-of-goods-sold percentage: Company F has a lower cost-of-goods-sold

percentage,reflecting both its premium pricing and the lower costs associated with
software production.Company E’s cost-of-goods-sold percentage is higher, reflecting
its strategy of making money onvolume rather than from individual product margins.

Gross profit versus net profit: Company F has higher gross profit, consistent with the
premium pricing of its highly differentiated product designs versus the commodity-
productapproach of company E. Conversely, company E’s net profit margin is almost
twice as large ascompany F’s, which reflects company E’s low-cost focus.

SG&A percentage: Company E has a lower SG&A percentage, consistent with its
lowcostmail-order strategy. Company E’s higher SG&A reflects the costs associated
with its uniqueretail store concept.

Receivables turnover: Company F has a higher receivables turnover, reflecting the

fastpayments made by consumers in the form of credit card purchases.

Fixed asset turnover: Company E’s turnover is more than twice as large as F’s. This
mightreflect E’s strategy as an assembler of components that have been
manufactured by its suppliers.

Books and music: companies G and H

Company G is Amazon.com: the on-line retailer of books and music, plus a variety
ofother consumer goods. Company H is Barnes & Noble, Inc., the largest
bookseller in theUnited States, with more then 800 brick-and-mortar bookstores. The
key differences betweenthose two firms primarily derive from one being an
established, traditional retailer and the otherbeing a relatively new, on-line business.
Cash and short-term-equivalents percentage: Company G has more than half of its
assetsin cash and cash equivalents, which may reflect the firm’s readiness for
implementing itsacquisition strategy. (Alternatively, this conservative position may
illustrate the carefulness that isrequired in the volatile on-line retail business.)

Inventories percentage: Company H’s proportion of inventories is significantly higher

thancompany G’s, because company H must maintain stocks of books, CDs, and
videos at all of itstraditional stores, whereas company G can keep a more limited
inventory at its distributioncenters.

Net fixed assets percentage: Company G, an on-line retailer, needs far fewer fixed
assetsthan company H, the bricks-and-mortar bookseller, to sell its merchandise.
Company G’spercentage of net fixed assets is, therefore, significantly higher.

Long-term-debt percentage: More than half of company G’s percentage of total

liabilities& equity is comprised of long-term debt. This may be because company G,
unable to raise capitalin a post dot-com bust environment, sought financing through
the debt market to fund itsacquisitions.

Beta: Company G’s beta is more than three times higher than company H’s, which
illustrates the relatively higher risk of company G, which only recently began to post
positive netincome.

Inventory turnover: Given its ability to keep relatively low inventories, it is not
surprisingthat company G would also be able to manage a high turnover ratio. Since
company H mustmaintain high stocks of merchandise, it has a correspondingly lower
inventory turn.

Net profit margin: Company H has a lower net profit margin than company G, which
reflects company H’s regular discount strategy.

Paper products: companies I and J

Company I is the International Paper Company: a large, vertically integrated

paperproducts manufacturer. Company J is the Wausau Paper Corporation, a
small, specialty-papersoperation. The financial distinctions between the firms arise
primarily from their scale and scope.

Inventories percentage: Company J, the smaller, specialty producer of papers,

carriesinventories at twice the rate of company I. This may occur because company
I’s smaller scalerequires the firm to carry a higher proportion of inventory in order to
satisfy its demandingcustomers.

Cost-of-goods-sold percentage: Company I has a markedly lower percentage of cost

ofgoods sold (and a correspondingly higher gross profit) than company J, even
though the rawmaterials for each company’s goods are essentially the same. This
illustrates not only company I’sability to negotiate lower volume-prices, but also the
benefits of having its own forests and lumberoperations (versus company J, which
purchases raw materials on the open market).
SG&A expense percentage: Company I’s selling, general, and administrative
expense arehigher than company J’s, which may reflect the higher costs associated
with being a largecompany. (Note how those higher SG&A costs flow through the
income statement, such thatcompany J’s net profit margin is ultimately higher than
I’s.)

Hardware and tools: companies K and L

Company K is the Black and Decker Corporation, which manufactures and

markets abroad range of power tools, primarily for consumer use. Company L is
Snap-on Inc., also amanufacturer of tools and other hardware, but the company is
known for its high qualitymerchandise and for its direct sales to professional
mechanics and commercial technicians.

Receivables percentage: Company L has a higher percentage of receivables

compared tocompany K. This result occurs because company K markets directly to
professional end-users andprovides financing, which may cause delays in
repayment. Company L, on the other hand,primarily sells its merchandise to large
retailers, which may have more regular payment schedules.

Gross profit percentage: Company K sells lower-priced products intended for the
consumer market, whereas company L markets higher margin precision tools for the
commercialcustomer. As such, company L’s gross profit percentage is measurably
higher than K’s.

SG&A expense percentage: Company L has a higher level of selling, general, and
administrative expenses, which corresponds to the costs associated with maintaining
its largedirect sales force. (This flows through the income statement, leading to a
lower net profit marginand a lower return on equity for company L versus company
K).

Dividend payout ratio: Company L’s payout ratio is more than four-and-a-half times
greater than K’s, which may suggest its need to maintain a high rate of reinvestment
to remaincompetitive.

Retailing: companies M and N

Company M is Wal-Mart Stores, Inc., and Company N is the Target Corporation:

Wal-Mart is well known for the breadth of its merchandise and its “everyday low
prices” strategy.Target is also a discount retailer, but Target appeals to its
customers’ more upscale tastes. Theessential differences here are product focus
(breadth versus depth) and pricing strategy.

Receivables percentage: Receivables at company N are much higher than at

company M,reflecting N’s substantial credit activities.

Inventories percentage: Company M has higher relative inventory levels, which may
reflect the company’s commitment to providing a vast selection of goods.
Cost-of-goods-sold percentage: Company N has a relatively lower cost-of-goods-
soldpercentage, reflecting its relatively fuller price for proprietary, designer-made
products. CompanyM offers low prices, which, all else being equal, would result in a
higher COGS/sales percentage.

Receivables turnover: Company M has a higher receivables turnover, due to its

lower useof credit sales.

Newspapers: companies O and P

Company O is Lee Enterprises: the owner of a number of small newspapers in the

Midwest. Company P is The New York Times Company. The strategic difference
betweenthose two entities is along the centralization/decentralization dimension.
Company P has acentralized, well-managed inventory system, whereas company O
corresponds to the profile of adecentralized publisher.

Net fixed assets: As a largely centralized operation, company P has a significantly

higherlevel of net fixed assets than company O; in addition, this reflects company
O’s recent investmentin a large corporate headquarters.

Intangibles percentage: Company K bears some of the features of a decentralized

operation, perhaps built by acquisition, since its intangibles comprise almost 77% of
total assets,which suggests the existence of substantial goodwill created by
acquisitions or equity interests inunconsolidated subsidiaries.

Cost-of-goods-sold percentage: Company P’s level of cost of goods sold is lower

thancompany O’s, which may suggest that as a larger centralized company,
company P may be in abetter position to negotiate for volume discounts on inputs,
such as newsprint.

SG&A expense percentage: Although the case states that firm O is decentralized
(suggesting, for instance, duplicative editorial and business functions at its many
smallnewspapers), the SG&A percentage is slightly lower for this firm. One possible
explanation is thathigh prices may be masking a relatively high SG&A expense. A
way to determine this would be toexamine performance ratios such as subscriptions
or advertising revenue per employee(unfortunately, the case does not present these
data). This is a learning point for the student: howratio analysis begets more
questions and analysis.

Price-to-earnings ratio: Company O’s price-to-earnings (P/E) ratio is higher than

company P’s, which may indicate the expectations of growth for company O, which
has been ableto increase earnings through acquisitions. As the dominant market
player on a larger scale,company P may be unable to grow through strategic
acquisition.

Net profit margin: Company O’s net profit margin is higher, which may reflect the
“localmonopolies,” or at least less intense competition outside of the major
metropolitan newspapermarkets.

Some Closing Points

After surveying the industries and revealing the identities of the firms, a useful
closing forthe instructor is to summarize the determinants of the big differences
between firms in the same
industries:

Market positioning/customer focus

• Consumer versus institutional (health products)
• Discount versus full price (retail, computers)
• Single high-profile versus diversified low-profile (newspapers)
• On-line versus bricks-and-mortar (books and music)

Product mix
• Specialty versus full line (retail, paper)
• Mass market versus niche (beer, tools)

Asset mix
• Asset intensity versus service intensity (books and music)

Financial policy
• Debt versus equity (paper, beer, tools)
• Off-balance-sheet financing (retail, beer)