Investing in UnderArmour
OurPE firm has identified an investment opportunity at UnderArmour.After the identification of the opportunity, the next step will be tocarefully analyze the opportunity. We will consider several factorsin order to determine if this is a financially viable opportunity.The first factor will be to analyze the market in which the companyoperates. We will consider the current market size and the potentialgrowth expected for the next five years. The company`s market shareand its growth over the past five years will be analyzed. This willhelp us understand if the company has been expanding its market shareor the market share has been declining. Market share and marketgrowth analysis will provide crucial information on the company`sexpected growth in earnings.
Thesecond analysis we will conduct will look at UnderArmour`scompetitive position. We will identify what customers consider uniqueabout the company products. Customers` perceived uniqueness will helpus determine the level of customer loyalty to the company and thelevel of customer bargaining power. Our competitive position analysiswill also cover the threat of new entrants. New entrants with a goodstrategy and unique products can be a threat to UnderArmourscompetitive edge. We will consider how easy is it for a new companyto enter and exit the market. If there are a few barriers to entryand many exit barriers, then there will be high competition in themarket. Strong competition can lead to fluctuating sales if a companydoes not have a good marketing strategy.
Thirdly,we will consider the management capability. The success of thecompany will be highly dependent on the quality of the management. Wewill review the management`s experience and how long they have workedin the company. The success of strategies implemented by themanagement will be indicative of how well the management understandsthe company and the market. Top management changes will also beconsidered. If there have been frequent changes in the topmanagement, then this could be an indication of something wrong inthe company. Will also examine if there are any planned changes insenior management for the next five years.
Thelast step will be to value the company. In this step, we will useseveral valuation techniques such as the net present value (NPV) andfree cash flow to equity. This step is very important since it willhelp us determine the amount of consideration to be paid. The netpresent value will give us an indication of what our firm will beable to gain during the investment period. The valuation of free cashflows to equity will help us determine the maximum amount ofconsideration we need to pay. Free cash flow to equity is the amountavailable to equity shareholders of a company after deducting debt.
Theamount of return we expect will be determined by several factors. Thefirst factor will be the level of risk of investing in the company.If the risk is high, then high returns will be expected. Thefinancial risk of the project can be estimated through thecalculation of the variance and standard deviation of the expectedreturns. The expected return will also need to be above our weightedaverage cost of capital. If we have used only one source of capitalto invest in the project, the expected return should exceed the costof this source of capital. This is the only way we will be able tomake a profit. Depending on the stability UnderArmour`s externalenvironment, the expected return could be fixed or variable for thenext five years.
Inconclusion, all the above steps will reveal if it is worth investingin UnderArmour. The analysis will show areas which need questioningand further due diligence procedures. For example, if sales are amajor component in the valuation, then a sensitivity analysis shouldbe conducted to show the effects of changes in sales to the value ofthe company.
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