gainesboro case presentation

Gainesboro Case AnalysisApplied Business Finance UNC Charlotte MBAD 6154

Dividends are real money. That's the hallmark of a blue chip stock. If a company doesn't pay a dividend, it's a speculation.

Geraldine Weiss (Sullivan, Dividend Stocks Pay Off)

(When) asked if the company planned to start paying a dividend or initiate a stock buyback program, "At this time, we have no plans to do either. We don't think it's our job to manage our shareholders. It's our job as the management team to manage the company, to manage it through when the stock price is going up and to manage it when the stock price is going down.

Steven Jobs (Hillis, Apple Plans no Dividend or buyback)

GAINESBORO MACHINE TOOLSPAYOUT POLICY FOR A NEW IDENTITY

Clay FowlerJabbar Jamison

AppliedBusinessFinanceUNCCharlotteMBAD6154

AGENDA

Applied Business Finance UNC Charlotte MBAD 6154 Gainesboro Case Analysis

Gainesboro Their dilemma

Payout policy Dividends

Relevant theories Repurchases Signaling Payout policy in the 21st century

Recommendation Forecasts and supporting evidence

Suggested Readings

GAINESBORO

Gainesboro Case Analysis

Conventional industry: Machine tools manufacturing

Historically strong earnings and regular dividends

25% of revenue

New industry: CAD/CAM software industry

Expensive restructuring

Enormous growth potential, domestic and international

Applied Business Finance UNC Charlotte MBAD 6154

/Gainesboro_and_their_dilemma


GAINESBORO MACHINE TOOLS CORP.

Consolidated Income Statements (in thousands of dollars, except per-share data)

Shares Outstanding 18,600,000

For the Years Ended December 31, Projected

2002 2003 2004 2005

Net sales $ 858,263 $ 815,979 $ 756,638 $ 870,000

Cost of sales 540,747 501,458 498,879 549,750

Gross profit 317,516 314,522 257,759 320,250

Research & development 77,678 70,545 75,417 77,250

Selling, general, & administrative 229,971 223,634 231,008 211,500

Restructuring costs 65,448 0 89,411 0

Operating profit (loss) (55,581) 20,343 (138,077) 31,500

Other income (expense) (4,500) 1,065 (3,458) (4,200)

Income (loss) before taxes (60,081) 21,408 (141,534) 27,300

Income taxes (benefit) 1,241 8,415 (750) 9,282

Net income (loss) ($61,322) $12,993 ($140,784) $18,018

Earnings (loss) per share ($3.25) $0.69 ($7.57) $0.98

Dividends per share $0.77 $0.25 $0.25 $0.39

/Gainesboro_and_their_dilemma /Income_statements


DILEMMA

Two expensive realignments

$61.3 million loss in 2002

$140 million loss in 2004

Still paid $.25 / share dividend

Share price down 24% from one year ago

Avg$29.15 in 2004, currently

/Gainesboro_and_their_dilemma


/Payout_policy

PAYOUT POLICY

How can a company increase its value through its choice

of distribution policy, defined as the level of distribution, the

form of distribution, and the stability of distributions?

Optimal distribution policy


/Payout_policy/Dividends_and_dividend_theory

DIVIDENDS AND DIVIDEND THEORY

Dividend Irrelevance Theory

Distribution method is irrelevant to firm value

Investor creates their own distribution




Bird-in-hand theory

Suggests dividends preferred over capital gains

Reliability trumps potential




Tax preference theory

Capital gains preferred over dividends

Capital gains taxes are avoidable and deferrable

Tax liability begets dividend avoidance




Clientele effect

Different strokes

One clientele is as good as another


/Payout_policy/Stock_repurchases

STOCK REPURCHASES

Buybacks via open market or tender transaction

Boosts EPS

Adjusts capital structure

Flexibility / Timing effects

Signals confidence in future earnings


/Payout_policy/Signaling

SIGNALING

Information implicitly revealed

Market uses and consumes information content

Emperical studies show

Potential consequences


/Payout_policy/_in_the_21st_century

PAYOUT POLICY IN THE 21STCENTURY

66.% in 1978 to 20.8% in 1999

Lower propensity to pay

Changing company characteristics


/Payout_policy/Recommendation/Alternatives

THE ALTERNATIVES

Alternative options

Various dividend payout ratios (exhibit 8a)

40%

Residual dividends (18%)

Revenue-mix adjusted dividend (~10%)

0%


/Payout_policy/Recommendation

RECOMMENDATION

Zero-dividend high-growth stock with residual

repurchases

New industry offers considerable growth opportunities

Prior income-seeking clientele have divested


/Payout_policy/Recommendation/Optimal

Exhibit 4 - Revised

GAINESBORO MACHINE TOOLS CORP.Stockholder Comparative Data, 1994 and 2004(thousands of shares)

1994 2004 Percentage Change in Clientele

Shares Percentage Shares Percentage

Founders' families 2,390 13% 2,421 13% 0%Employees and families 3,677 20% 3,155 17% -15%Institutional investors

Growth-oriented 2,390 13% 1,138 6% -53%Value-oriented 1,471 8% 2,421 13% 63%

Individual investorsLong-term; retirement 6,803 37% 4,806 26% -30%Short-term; trading-oriented 919 5% 2,421 13% 160%Other; unknown 735 4% 2,239 12% 201%

Total 18,385 100% 18,600 100%



RECOMMENDATION


repurchases



Industry peers comparison


Annual growth rate of cash flow (%)

Sales ($mm) Last 5 yearsNext 3-5

years

Current payout

ratio (%)

Current dividend yield (%)

Debt/ equity (%)1

Insiderowner- ship

(%)P/E ratio

(x)

Gainesboro Machine Tools Corp. 504 (1.5) 15.0 0.0 0.0 28.0 30.0 nmf

CAD/CAM companies (software and hardware)Autodesk, Inc. 1,234 4.5 10.5 6.0 0.3 0.0 3.2 25.3 Ansys, Inc. 135 16.5 13.0 0.0 0.0 0.0 4.4 23.3 Cadence Design 1,198 (1.5) 6.0 0.0 0.0 24.7 3.5 21.4 Intergraph Corp. 551 (8.0) 12.0 0.0 0.0 0.2 3.1 25.7 Mentor Graphics 711 4.5 2.0 0.0 0.0 65.5 5.9 21.9 Moldflow Corp. 49 nmf 11.5 0.0 0.0 0.0 15.4 36.2 Parametric Technology Corp. 660 (6.5) 6.0 0.0 0.0 0.0 5.4 33.4 Synopsys, Inc. 1,092 6.5 6.0 0.0 0.0 0.0 5.6 26.5

Electrical-industrial equipment manufacturersCooper Industries, Inc. 4,463 1.5 3.0 39.0 2.4 30.6 1.0 16.4 Emerson Electric Company 15,615 2.5 3.5 54.0 2.6 43.3 0.8 20.5 Hubbell Inc. 1,993 5.0 6.0 52.0 3.0 21.1 2.9 17.6 Thomas & Betts Corp. 1,516 (10.0) 5.0 0.0 0.0 60.2 2.4 17.7

Machine tool manufacturersActuant Corp. 976 (21.5) 12.5 0.0 0.0 180.8 5.9 19.1 Lincoln Eletric Holdings, Inc. 1,334 2.5 10.0 32.0 2.2 28.4 5.2 15.0 Milacron, Inc. 774 (15.5) (2.5) 0.0 0.0 468.1 4.6 nmfSnap-On Inc. 2,407 5.0 3.5 71.0 3.1 18.3 3.0 22.9



RECOMMENDATION


repurchases



Industry peers comparison

Repurchases: Flexibility and signaling effects

Pursue re-branding initiatives


CLASS COMMENTARY

gainesboro case presentation

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