Utrecht Summer School 2015 Portfolio Analysis Presentation

Portfolio ReportKoninklijke

Philips N.V. General Electric

Tony SakoNikos Georgitsopoulos

Ali Dehghan SaeeBastiaan Smit

Introduction

Introduction and assumptions

Philips & General Electric• Company Profile• Risk & Return• Ratio & Fundamental Analysis• Credit Ratings & Analyst reports

Optimal Risky & Combined Portfolio

Conclusion & Recommendation

Company profile - Philips

Founded in 1891 by Gerard Philips and his father Frederik

Headquartered in Amsterdam, the Netherlands

One of the largest electronics companies in the world

Areas: Healthcare, Consumer Lifestyle and Lighting, Cardiac care, Energy efficiency, lighting applications

Operates in approximately 100 countries

PEST Analysis - Philips Political

• Global political conflicts could impact the international capital and credit markets• All established subsidiaries are exposed to governmental regulations and unfavorable political developments

Economic• Global recession and economic downturn particularly in consumer markets has reduced the company’s financial figures

• Strong growth in energy-efficient lighting solutions resulted in a significant sales increase

Social• Highly influenced by social and demographic trends: growing demand for better healthcare at lower costs, consumer empowerment and the need for energy efficiency

• Various accusations related to labor rights

Technological• Severe competitive challenges: the speed of innovation, shortening product life cycles, fast-moving market trends and rapid technological change

• Experiences the need to continuously reduce costs, increase efficiency and enhance technologies

Company profile – General Electric Founded in 1892 (merging of Edison General

Electric company & Thomson-Houston Electric company)

Headquartered in Connecticut, USA

Areas: Appliances, Power and Water, Oil and Gas, Energy Management, Aviation, Healthcare, Transportation and Capital

Operating in over 100 countries and listed on the Dow index

PEST Analysis - General Electric Political

• Dealing with political systems of different nations, increasing its political risk. Different countries provide different working conditions and tax systems which increases risk

Economic • Changes in rates of interest, exchange rates in different countries and

greatly affects its financial performance• Global recession and economic downturn particularly in consumer markets has

reduced the company’s financial figures

Social• Highly influenced by social and demographic trends• It may bears even more risk due to larger variety of products offered

Technological• The speed of innovation, shortening product life cycles, fast-moving market

trends and rapid technological change• A need to continuously reduce costs, increase efficiency and enhance

technologies

Assumptions

Risk aversion factor of 3.5

Monthly returns are normally distributed

Risk-free rate of 4.0%

The market information is derived from S&P500 (calculations rely on the Expected Return forecasted by S&P Analists

Historical Risk & Return (mth.) Analysis

GE historical returns outperforming; Philips returns in line with market, despite higher beta Both stocks more volatile than the market (around twice) Phillips significantly more volatile Even though both stocks have about equal risk(beta), GE Sharpe

ratio almost double that of Philips

Key Figures GE Philips MarketMean Return 0,67% 0,58% 0,56Standard Deviation 7,64% 10,05% 4,38%Sharpe Ratio 0,044 0,025 0,0523Beta 1,48 1,5 1

Key Figures GE Philips MarketBeta 1,48 1,5 1Required Return (1-Year) 18,8% 19% -Expected return (1-Year) 14,9% 25,7% 14%Alpha -4,1% 6,7% -

Risk & Return Forward Analysis

Required returns nearly same, in line with similar betas 12-Month Expected returns for Philips significantly higher than

for GE PHG to outperform - GE expected to underperform GE better track record but Philips better forecasts

• Past or future which to prioritize?• Look to Optimal Portfolio for Quantitative Answer

Credit ratings Philips Short-term• P-2 rating• “Stable outlook”

Long-term• Downgrade A3 to Baa1• “Weaker-than-expected

operating performance through 2014”

Stable• A/A-2 rating• “Stable rating”

“Overall stable”

• Downgrade A to A- rating

Recommendation 1 Mht 3 MthStrong buy 1 1Buy 0 0Hold 0 0Underperform 0 0Sell 0 0

Ratio analysis PhilipsLiquidity ratios 2013 2014 GrowthCurrent ratio 1,33 1,31 -0,3Quick ratio 0,97 0,95 -0,2Net working capital 2,825 2,853 28

Solvability ratios 2013 2014 GrowthTotal assets / debt capital

1,73 1,62 -0,12

Equity / total assets 0,42 0,38 -0,04Equity / debt capital 0,73 0,62 -0,11

Profitability ratios

2013 2014 Growth

Operating profit 8,7% 2,3% -6,0%Net income / equity 10,5% 3,8% -7,5%Net income / debt capital 11,0% 1,1% -10%Net income / total assets 6,4% 0,7% -0,06

Credit ratings GE Both long- and short term

• Downgrade A1 to Aa3• “Consequent of announced

plans to sell $200 billion of ending net investment in GE Capital

Rating outlook remains stable

Stable• AA+ credit rating• “Stable rating”

“Overall stable”

• Downgrade A to A- rating

Recommendation 1 Mht 3 MthStrong buy 5 5Buy 4 5Hold 8 9Underperform 0 0Sell 0 0

Ratio analysis GELiquidity ratios 2013 2014 GrowthCurrent ratio 5,15 1,33 -3,82Quick ratio 4,94 0,97 -3,97Net working capital 340 324 -16,00

Solvability ratios 2013 2014 GrowthTotal assets / debt capital

1,66 1,66 -0,01

Equity / total assets 0,20 0,20 -0,00Equity / debt capital 0,33 0,33 -0,01

Profitability ratios

2013 2014 Growth

Operating profit 18,0% 18,0% 0,00Net income / equity 10,0% 11,9% 0,02Net income / debt capital 4,1% 4,4% 0,03Net income / total assets 2,5% 2,7% 0,02

Optimal Risky PortfolioWeight GE Weight PHG

Optimal Portfolio 89,9% 10,1%Minimum Variance 74,1% 25,9%

Optimal/Tangency Portfolio• Heavily Weighted

GE Minimum Variance

Portfolio• Includes more of

PHG

0.0600 0.0650 0.0700 0.0750 0.0800 0.0850 0.0900 0.0950 0.1000 0.10500.52%

0.54%

0.56%

0.58%

0.60%

0.62%

0.64%

0.66%

0.68%

Efficient Frontier Risky Portfolio Optimal PortfolioMin. Var. Portfolio

0.0000 0.0200 0.0400 0.0600 0.0800 0.1000 0.12000.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

Efficient Frontier Risky Portfolio

CAL

Optimal Portfolio

Combined Portfolio

Optimal risky & Combined portfolio

Weight Risk-free

Weight Risky Portfolio

Stock Weights Risky Portfolio

Combined Portfolio

80,7% 19,3% GE = 17.35% PHG = 1.96%

Conclusion Comparison GE Philips Optimal P Combined P S&P500

Risk-free Rate 0,0033 0,0033 0,0033 0,0033 0,0033 Mean Return 0,0067 0,0058 0,0070 0,0044 0,0056 Std. Deviation 0,0764 0,1005 0,0739 0,0143 0,0438 Sharpe ratio 0,0442 0,0253 0,0500 0,0802 0,0523

Individually Stocks with some deficiencies• GE good risk-return profile but expected underperformance• PHG poor risk-return profile and minimal coverage but promising prospects

Optimal Portfolio • Better risk-return profile than individual stocks• Better returns than market

Combined Portfolio • Lowest Risk & Best Sharpe Ratio• Can be tailored according to individual risk preferences

Questions