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Blue Jeans and Stock Selection
Blue Jeans and Stock Selection
Blue Jeans and Stock Selection
PRESENTED BY:
CHETAN SIDANA
ISHITA SOOD
MOHIT GOYAL
NIKKI WARIACH
PUNEET GARG
SANYAM GROVER
INTRODUCTION OF THE CASE
• Mr. H.B. Babalola is considering to invest in denim
industry by purchasing shares of a raw material
supplier of denim , “DENTEX”. It specialized in denim
and holds 1/3rd sales of the total denim market
North America 39 %
Western Europe 20 %
0.5
0.4
Axis Title
0.3
0.2
0.1
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Years
The firm has a variable dividend payout ratio. It steadily declined from
0.5 to 0.2 (1997-2001) and hovered around 0.2 – 0.25.
Currently it has witnessed a sharp increase to 0.37
Q3. What is the annual growth
rates in the earnings per share
and the dividend ?
Year EPS EPS Growth Rate DPS DPS Growth Rate
% %
2007 5.87 -33.44 2.2 10
2006 8.82 17.75 2 11.11
2005 7.49 20.61 1.8 12.5
2004 6.21 -8 1.6 18.51
2003 6.75 37.75 1.35 42.10
2002 4.9 23.42 0.95 26.66
2001 3.97 58.16 0.75 7.14
2000 2.51 58.86 0.7 27.27
1999 1.58 18.79 0.55 7.84
1998 1.33 33 0.51 2
1997 1 - 0.5 -
DPS Growth Rate %
45
DPS growth has been
40 extremely volatile,
probably due to volatility
35 in growth of EPS
30
25
20
15
10
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
EPS
Compound Annual Growth Rate (CAGR) =
-n
[(Ending Value/ Begin Value) )] – 1
-10
= [(5.87/1) ] – 1
= 1.1936 – 1
= 19.36%
DPS
Compound Annual Growth Rate (CAGR) =
-n
[(Ending Value/ Begin Value) )] – 1
-10
= [(2.20/0.5) ] – 1
= 1.1597 – 1
= 15.97%
Q4. Is there any reason to believe that
the firm has changed its dividend
policy ?
The company has followed a policy of increasing
dividends since 1997 (Exhibit 2).
2004 onward there has been a an absolute increase in
DPS of $0.20
There has been a dip in the EPS in 2004 and 2007. For
2007 we see decrease of 10% in sales and a decline in
cost of sales of 8%. Thus lower profits.
There has also been a purchase of land and building –
lower cash flows – lower dividend payout.
Q5. Risk is affected by many factors.
How each of the following affect the
firm-specific (unsystematic) risk
associated with Dentex?
(a) The firm’s geographical location
(b) The product line
(c) Its use of Debt. Financing
(d) Foreign competition
(a)The geographical location is to the
advantage of the company since
Americans don’t wear traditional
clothes.
(b)Compared to other western countries
like UK where clothing has to be more
formal, people in states wear jeans even
at work.
(c)Geographical location of the
company/product does not pose any
risk.
(b) Dentex is primarily a denim manufacturer. While this
fabric may be popular, any change in demand will certainly
have an impact on Dentex.
Other firms have a diverse product line to reduce risk, Dentex
is following the opposite strategy.
Demand for denim jeans is price inelastic. The price range is
wide for jeans. And there is no question of jeans going out
of style. Reasons:
• Comfortable
• Do not require frequent washing/cleaning
• Versatile
• Durable and long lasting
• Affordable
(c) Dentex uses a modest amount of financial
leverage as its debt ratio is less than the
industry average (6 versus 33 %). The firm does
not use an excessive amount of debt financing,
so there is no reason to conclude it has much
financial risk.