Abstract
This treatise is a report to the Chief Finance Officers of Occidental Petroleum Corporation, Nike, Inc., and McKesson Corporation on the impact of several variables on the movement of stock prices of these companies. Occidental Petroleum Corporation operates in the oil and gas industry. McKesson Corporation operates in the pharmaceutical industry while Nike, Inc. operates in the apparel and accessories industry. The regression analysis shows that, for the three companies, all the variables selected were not a significant determinant of movements in stock prices as indicated by the t-test.
Also, the overall regression lines for the three companies were not significant as indicated by f-test. Further, the coefficients of determination were low and it also shows that the explanatory variables do not explain significant variation in the movement of stock prices. The sensitivity analysis carried out for Nike, Inc. shows that there is a high probability that the events that will occur in 2015 will increase economic profit and stock prices.
Stock price analysis
Regression analysis
Regression analysis develops and estimates linear relationships among various variables. When coming up with the model, it is necessary to separate between dependent and independent variables. Regression models can be used to predict trends of future variables. The section focuses on multiple regression analysis to establish the relationship between a number of variables for three different companies these are, Occidental Petroleum Corporation, McKesson Corporation, and Nike, Inc.
Independent and dependent variables
In this section, a regression analysis will be carried out between movement in stock prices and movement in economic profit, revenues, and gross domestic product. Therefore, movement in stock prices is the explained variable while movements in the other variables are the explanatory variables.
Modelling
The regression equation for the three companies will take the form Y = a0 + a1X1 + a2X2 + a3X3.
Where;
- X1 represents movement in economic profit
- X2 represents movement in revenue
- X3 represents movements in gross domestic product (GDP)
The theoretical expectations are a0 can take any value, a1<0, while a2 and a3>0.
Discussion of results
The results of the regression analysis for the three companies are presented in the appendix 1.
Occidental Petroleum Corporation
Interpretation of signs
The regression equation for Occidental Petroleum Corporation can be written as Y = -0.10770 – 0.1185X1 – 0.2912X2 + 8.2451X3. The coefficient of movement in economic profits is negative. This implies that if economic profit increases by one unit, then stock prices will decline by 0.1185 of a unit.
This gives an inverse relationship between the two variables. The coefficient of revenue is negative. This means that an increase in revenue by one unit results in a decline of stock prices by 0.2912 of a unit. This gives an inverse relation between the two variables. The coefficient of GDP is positive. This shows that if GDP increases by one unit, then the price of the stock will increase by 8.2450.
Correlation
Correlation coefficient measures the degree of association between two variables. The correlation results are presented in appendix 1. The coefficients show that there is a weak negative relationship between economic profit and stock prices and a weak positive relationship between stock prices and revenue. The same applies to GDP. The matrix also shows that there is a strong positive relationship between GDP and economic profit and revenue.
Test of significance
A two tailed t-test will be used to test the significance of the explanatory variables. The test will be carried out at 5% level of significance. The hypothesis is stated below.
Null hypothesis: Ho: Xi = 0
Alternative hypothesis: Ho: Xi ≠ 0
The null hypothesis implies that the variables are not significant determinants of movements in stock prices. The null hypothesis will be rejected if the value of t-calculated is greater than the value of t-tabulated or if the p-value is less than α=0.05. The t-statistics for economic profit is 0.6994, revenue is 0.6348 and for GDP is 1.123. The p-values for economic profit are 0.5041, revenue is 0.5433 and for GDP is 0.2939. Since the p-values are greater than α=0.05, then do not reject the null hypothesis and conclude that variables are not significant determinants of movements in stock prices.
Further, value of f-significance is greater than α = 0.05. This shows that the overall regression line is not significant. The coefficient of determination is 15.67%. It indicates that the regression model is weak because the independent variables explain only 15.67% of the variations in stock movement. Finally, analysis of the contribution calculations shows that GDP makes the highest impact to movement in stock prices as compared to the other variables.
McKesson Corporation
Interpretation of signs
The regression equation for the company is Y = -0.17951 + 0.1308X1 + 2.4923X2 – 2.4174X3. The coefficient of movement in economic profits is positive. Thus, if economic profit increases by one unit, then stock prices will rise by 0.1308 of a unit. This gives a direct relationship between the two variables.
The coefficient of revenue is positive and an increase in revenue by one unit will cause the stock prices to increase by 2.4924. Therefore, there is a direct relationship between the two variables. The coefficient of GDP is negative. This shows that if GDP increases by one unit, then the price of the stock will decline by 2.4174. This shows a positive relationship.
Correlation
The correlation coefficient shows that there is a weak positive relationship between economic profit and stock prices and a weak negative relationship between stock prices and revenue. Further, there is a weak positive relationship between GDP and stock movement.
Test of significance
A two tailed t-test will be used to test the significance of the independent variables. The test will be carried out at 5% level of significance. The hypothesis is stated below.
Null hypothesis: Ho: Xi = 0
Alternative hypothesis: Ho: Xi ≠ 0
The null hypothesis implies that the variables are not significant determinants of movements in stock prices. The null hypothesis will be rejected if the value of t-calculated is greater than the value of t-tabulated or if the p-value is less than α=0.05. The calculated value of t for economic profit is 0.5274, revenue is 1.3505 and for GDP is 0.5269.
The p-values for economic profit are 0.6122, revenue is 0.2138 and for GDP is 0.6126. Since the p-values are greater than α=0.05, then do not reject the null hypothesis and conclude that the variables are not significant determinants of movements in stock prices. Further, value of significance f (0.1523) is greater than α = 0.05.
This shows that the overall regression line is not significant. The coefficient of determination is 58.02%. This implies that the regression model is strong because the independent variables explain only 58.01% of the variations in stock movement. Finally, the contribution calculations show that revenue explains the highest percentage of the movement in stock prices.
Nike, Inc.
Interpretation of signs
The regression equation for Nike, Inc. is Y = 0.2293 – 0.00668X1 – 1.2284X2 + 0.8487X3. The coefficient of movement in economic profits is negative. Therefore, if economic profit increases by one unit, then stock prices will decline by 0.0066 of a unit. This gives an indirect relationship between the two variables. The coefficient of revenue is negative. Thus, an increase in revenue by one unit results in a decline of stock prices by 1.2284. This gives an inverse relation between the two variables. The coefficient of GDP is positive. If GDP increases by one unit, then the price of the stock will increase by 0.8487. This shows a direct relationship.
Correlation
The correlation coefficient shows that there is a weak negative relationship between stock prices and economic profit. The same applies to revenue. Further, there is a weak positive relationship between GDP and stock movement. It can also be observed that there is a strong positive relationship between revenue and economic profit.
Test of significance
A two tailed t-test will be used to test the significance of the independent variables. The test will be carried out at 95% level of confidence. The hypothesis is stated below.
Null hypothesis: Ho: Xi = 0
Alternative hypothesis: Ho: Xi ≠ 0
The null hypothesis implies that the variables are not significant determinants of movements in stock prices. The null hypothesis will be rejected if the value of t-calculated is greater than the value of t-tabulated or if the p-value is less than α=0.05. The t-statistics for economic profit is 0.1265, revenue is 0.6020 and for GDP is 0.2082.
The p-values for economic profit are 0.9025, revenue is 0.5638 and for GDP is 0.8402. Since the p-values are greater than α=0.05, then do not reject the null hypothesis and conclude that the variables are not significant determinants of movements in stock prices. Further, value of significance f (0.9820) is greater than α = 0.05.
This shows that the overall regression line is not significant. The value of R-square is 7.3434%. This shows a weak regression model because the independent variables explain only 7.3434% of the variations in stock movement. Finally, the contribution calculations show that the excluded variables made the highest contribution to movement in stock prices.
Comparison of results for the three companies
The results of Occidental Petroleum Corporation show that there is an inverse relationship between movement in stock prices and economic profit. The same applies to the relationship between stock prices and revenue. However, there is a positive relationship between movement in stock prices and GDP. The test of significance shows that the variables are not significant determinants of movements in stock prices. Also, the overall regression line is not significant. The value of R-square shows that the regression equation for the company is weak.
The regression analysis for McKesson Corporation shows that there is a direct relationship between movement in stock prices and economic profit. A similar observation applies to the relationship between stock prices and revenue. Further, there is a negative relationship between movement in stock prices and GDP. The test of significance shows that the variables are not significant determinants of movements in stock prices. Also, the overall regression line is not significant. The value of R-square shows that the regression equation for the company is strong.
In the case of Nike, Inc., there is a negative relationship between movement in stock prices and economic profit. This also applies to the relationship between stock prices and revenue. Further, there is a direct association between movement in stock prices and GDP. The test of significance shows that the variables are not significant determinants of movements in stock prices. Also, the overall regression line is not significant. The value of R-square shows that the regression equation for the company is weak. A comparison of the results of regression analysis is presented in the table below.
The relationship between movement in stock prices and economic profit, revenue, GDP for Occidental Petroleum Corporation is similar to Nike, Inc. McKesson had a different trend.
Economic profit calculation and movement analysis
Data
The table presented below shows a summary of economic profit for the three companies for the period between 2000 and 2013.
The table presented below shows the economic profit and movement in economic profit for the three companies.
Analysis
Occidental Petroleum Corporation and McKesson Corporation reported a decline in economic profit in 2001. Nike, Inc. had an increase. Further, between 2001 and 2003, McKesson Corporation and Nike, Inc. reported a decline in economic profit while Occidental Petroleum Corporation had an increase.
All the three companies reported an increase in economic profit between 2004 and 2006. From 2007 to 2011, the economic profit for Occidental Petroleum Corporation declined. McKesson Corporation had an increase economic profit during several years. Further, between the year 2007 and 2010, the economic profit for Nike, Inc. dropped. Thereafter, the economic profit increased. In general, an increase in economic profit is suitable for a business because it shows an increase in efficiency.
The minimum value of economic value for Occidental Petroleum Corporation is ($97,763.79). It occurred in 2006. The decline in economic profit can be attributed to the reduction in total revenue in that year. On the other hand, the highest economic profit reported amounted to ($1.518.10). This occurred in 2011 and it can be attributed to a significant decline in total costs and a corresponding increase in revenue. In the case of McKesson Corporation, the lowest value of economic profit was ($50,255.88).
This occurred in 2007 and it can be attributed to major investment made by the company and major challenges in the industry. The highest value was ($6109.75). The amounted was reported in 2000. The lowest amount of economic profit earned by Nike, Inc. amounted to ($17,085 million). This can be attributed to increased investment. The maximum amount of economic profit reported was $1771.26. This can be attributed the significant increase in revenue after the global crisis and divestment.
Research and sensitivity analysis
Business models and key events
Occidental petroleum Corporation
Occidental Petroleum Corporation operates in the oil and gas industry. Specifically, the company focuses on exploration and manufacturing of oil and gas. The main products that the company produces are petrochemicals, natural gas and oil. The three key areas that the company operates in are South America, North Africa and Middle East. The company was established in 1920 and it is based in the US. In terms of production, it is the largest in Texas.
Further, it trades on the New York Stock Exchange with the ticker symbol OXY. The company a component of S&P 500 Index. Some of the subsidiaries of the company are the INDSPEC Chemical Corporation, Oxy Vinyl and Occidental Chemical Corporation. The growth of the company was as a result of amalgamation of entities in more than thirty five countries. The business model of Occidental Petroleum Corporation has changed over time.
Currently, the company focuses on long-standing assets that have a potential of growth over a long period of time. The company has achieved this by focusing on the oil and gas business. The chemical segment supports the business because it generates a large amount of cash that exceeds investment expenditures. Some of the competitors of Occidental Petroleum Corporation are BP Limited, Royal Dutch Shell, Apache, Inc., and Chesapeake Energy.
The bottom line and the overall financial standing of Occidental Petroleum Corporation changed when the company acquired the Hooker Chemical Company.
The acquisition took place in 1968 at a cost of $2billion. Some of the recent events that can explain the historical prices are the acquisition of Phibro LLC in 2009, signing of Development and Production Sharing Agreement with the National Oil and Gas Authority of Bahrain in 2009, acquisition of ElK Hills Power Plant in 2010, increase in ownership of Plains All-American in 2010, purchase of a variety of assets worth more than $4.4billion in 2011 and $2.3billion in 2012, and purchasing a 50% stake in Mexichem among others.
McKesson Corporation
McKesson Corporation operates in the pharmaceutical industry. The company focuses on the distribution of medicines for resale. It also deals with provision of network infrastructure and household products. Based on the list of products offered by the company, it can be noted that the company is diversified.
Apart from distribution of medicine, it has also ventured in the provision of software and other information technology equipment. This segment contributed about 2% to the revenue. McKesson Corporation, established in 1933, is based in the US. The company is public and listed on the New York Stock Exchange with a ticker symbol MCK. Examples of competitors of McKesson Corporation are AmerisourceBergen Corporation, Cardinal Health, Inc., and Owens & Minor Inc. In term of capitalization, revenue, and operating profit McKesson Corporation performs better than the three competitors.
During the past year, the company operated the buy/hold business model. In this model, it would purchase drugs from the producers, hold them as it waits or the prices to rise, and sell them later at a profit to customers. However, with the change of focus from the branded to the generic drugs in the industry, this model was no longer profitable for the company.
This necessitated the change to the fee-for-services business model. In this new model, manufactures pay the distributor a certain amount of fees for meeting a predetermined level of distribution. This model has reduced the effect of inflation and it has increased the certainty of revenue received at the end of a financial year.
The medical technology segment has contributed significantly to the growth of the company than distribution of drugs. The company purchased HBO & Company in 1999. Some of the other companies that were acquired are RelayHealth and Practice Partner among others. Examples of other key initiatives that have shaped the historical performance of the company are the Health Mart pharmacy franchise, acquisition of the US Oncology Network at a cost of $2.16 billion in 2010, and joining the CommonWell Health Alliance. The three initiatives have significantly improved the bottom line of the company.
Nike, Inc.
Nike, Inc., is a public company that trades on the New York Stock Exchange with the ticker symbol NKE. Nike, Inc. is a component of both S&P 500 and Dow Jones Industrial Average. The company operates in the apparel and accessories industry. Specifically, the company focuses on the design, development, production and selling of sport equipment, athletic footwear, and other apparel.
Some of the competitors of the company are Adidas AG, New Balance Athletic Shoes, Inc., and PUMA SE. In terms of capitalization, revenue, and operating profit Nike, Inc. perform better than the three competitors. The management of the company has been concerned about the current business model that the company is using. The team is of the opinion that the financial, social and environmental factors will direct how the business model will progress in the future.
Thus, factors such as scarcity of resources, inventions, regulations, and consumer behavior. Going forward, Nike, Inc. intends to use the closed-loop business model. This model focuses on reclining wastes and composting. The company intends to convert the wastes into new raw materials for subsequent production.
The process of acquisition and divesting has played a key role in the growth of the company. The only remaining subsidiaries are Hurley International and Converse, Inc. Further, some of the products that had had a positive impact on the bottom line of the company are Nike Pro Combat jersey, and Nike + Sports band among others.
Review of performance
Occidental petroleum Corporation
Analysts are of the opinion that the financial performance of the company has been quite impressive over the years. The share price of the company exceeds that of its competitors such as BP Limited and Royal Dutch Shell. The profit and revenue increased by more than 20%. Further, the company has a low leverage level.
The current debt to equity ratio is 0.19%. Despite the increase in the balance of total assets from $44,229 million in 2009 to $69,443 million in 2013, revenue from $15,531 million in 2009 to $25,736 million in 2013, and net income rose from $2,915 million in 2009 to $5,903 million in 2013, the value of shares has been dropping in the recently.
The drop in share prices is attributed to declining prices for oil and gas. Despite this, analysts are of the opinion Occidental Petroleum Corporation is a good company with high potentials (Frangold 1). Further, even if the stock of the prices Occidental petroleum Corporation falls by half, the organization will still profitable. Finally, the biggest asset of the company is energy reserve that stretches for more than one million seven hundred thousand in the US.
McKesson Corporation
Analysts are of the view that the company has grown quickly through acquisition. Further, there was been tremendous growth in the share price of the company. The balance of total assets rose from $28,189 million in 2009 to $51,759 million in 2013, revenue from $108,702 million in 2009 to $137,609 million in 2013, and net income increased from $1,263 million in 2009 to $1,338 million in 2012. The company has a moderate level of debt in the capital structure. Profitability is fairly high while the liquidity level is low. Finally, the company pays a low amount of the dividend (Stock Market Sherpa 1).
Nike, Inc.
Nike, Inc. is an industry leader in the production of sport shoes and clothing. The constant payment of dividend since 1987 shows the company has a history of good performance despite the swings in the economy. The company has a strong competitive advantage and several iconic brands in the market. These two factors have contributed to the positive growth year after year. The financial performance of the company is expected to increase in the future.
Changes in market conditions such as the advancement of technology will not affect the growth rate. The total assets grew from $14,419 million in 2009 to $18,594 million in 2013, revenue from $19,014 million in 2009 to $27,799 million in 2013, and net income increased $1,907 million in 2009 to $2,693 million in 2013. The performance of the company exceeds the market. In general, Nike, Inc. is a company that is expected to stay in the market and grow for quite a long period of time (Sure Dividend 1).
Future events
The methodology will entail analyzing the possibility of occurrence of the events, assessing the impact of the occurrence of the event on the bottom line of the company and analyzing the cost implication of the event. The first event is that Nike, Inc. will launch the Spring/Summer 2015 Women’s collection in the first quarter of the 2015 financial year.
The second event is that Nike, Inc. plans to expand their operation in the emerging markets such as China. The company intends to venture into these markets through acquisitions partnership. These two events are likely to increase revenue by about $2billion in 2015.
What-if- analysis
The results of sensitivity analysis are presented in appendix 3. From the analysis carried out, the first event will result in an increase of the contribution from economic profit from 11.55% to 19.40%. The second event will increase the economic profit further to 20.58%. The two events will result in an increase in stock prices in 2015.
Works Cited
Frangold, Cris. Occidental Petroleum is a Big Value at $85. 2012. Web.
Stock Market Sherpa. McKesson has 30% Upside Potential and Represents Better Value than Amerisource Bergen. 2014. Web.
Sure Dividend. Nike: Goddess of Victory, Unstoppable Growth Business. 2014. Web.
Appendices
Appendix 1
Occidental Petroleum Corporation
Contribution margin
Correlation matrix
McKesson Corporation
Contribution margin
Correlation matrix
Nike, Inc.
Regression results
Contribution margin
Correlation matrix
Appendix 2
Occidental Petroleum Corporation
McKesson Corporation
Nike, Inc.
Appendix 3
What-if analysis 1
What-if analysis 2
Summary of event
Clarification – the words in quotation are regression output from excel.