Mattel Corporation specializes in creating lasting memories for every child the corporation is able to touch through the purchase of their toys. Therefore, the Mattel does not sell toys rather a child’s imagination and memories are forged and created respectively, via the purchase of their merchandise. (Corporate.Mattel.com/annual-report) Operations have been successful in U.S. markets from the 1950’s through 2000. Since however, the lion’s share of profits have been generated by overseas markets in Europe. (Corporate.Mattel.com/annual-report)
The risk factors for Mattel are generally macroeconomic in nature. Generally speaking if the global economy continue to realize marginal GDP growth outside of the ultra-hot Brazil, Russia, India, China (BRIC) region, Mattel’s business and financial results are likely to be adversely affected. (Corporate.Mattel.com/annual-report) Globalization will force additional forces on multinational corporations such as Mattel thus creating “governance risks inherent in value chains and networks.” (Abonyi, Van Slyke, 2010)
Global economic factors hurt financial performance in 2009. Although gross profit had increased from 2008 to 2009, Net Sales decreased by just under $500,000. (Corporate.Mattel.com/annual-report) Discretionary consumer spending is a major determinant of sales for Mattel and when global economic activity slows down, sales and subsequently profits are expected to fall below forecast.
The global economic slowdown is a function of increased inflation that is reflected in the consumer price index (CPI) rather the producer price index (PPI). The consumer, whom is already burdened with a poor job market and a reduced amount of available discretionary consumer spending levels, must now bear the burden of the rising manufacturing and raw material costs. Although the cost of oil, needed to manufacture oil-based products such as plastic, has risen and will continue to rise, Mattel will pass the increase in cost onto the consumer via higher pricing. Since toy’s face an elastic demand curve, the consumer is more responsive to price increases and will decide to leave the market rather pay the higher cost.
“Our performance is impacted by the level of discretionary consumer spending, which has deteriorated sharply in the United States and in many countries around the world in which Mattel does business. Consumers’ discretionary purchases of toy products may be impacted by job losses, foreclosures, bankruptcies, reduced access to credit, significantly falling home prices, lower consumer confidence and other macroeconomic factors that affect consumer spending behaviour.” (Abonyi, Van Slyke, 2010)
Such economic conditions will generally cause a decrease in the value of the equity traded on the stock exchange. Given the depreciation of the stock price relative to market conditions, it is best to remain with a low debt ratio. The advantages of equity financing for Mattel is the dilution of the equity price enables a stock buyback, which is seen as a positive sign by shareholders and stakeholders.
To finance the liabilities, a high debt ratio would leave Mattel exposed to interest rate risk, which is expected to eventually increase as core and secondary inflation increase globally forcing the U.S. federal reserve to raise interest rates. Such exposure would cripple Mattel and cause undesirable financial loss in an environment that would otherwise be conducive to growth. A low debt ratio enables more equity financing, thus rendering a favourable financial position when the interest rates increase and stock prices rise with Mattel holding a large number of class A and B. shares.
The Clorox Corporation provides consumer products such as bleach and other cleaning and maintenance products. Suppliers and other vendors to hospital systems throughout the U.S. have contracts with Clorox for proprietary products used under a different label for use in these clinical and sterile environments. Additionally, hundreds of millions of consumers a quarter rely on the consumer goods produced by Clorox to clean and sterilize bathrooms and kitchens throughout the modern home.
The risks faced by Clorox are similar to those faced by manufacturing and consumer companies globally. A slowing global economy with increasing competition from competitor products and a higher cost of market penetration in countries experiencing growth such as China and India threaten to reduce profitability for Clorox. (investors.theCloroxcompany.com/stock.cfm)
The performance of the company stock has been impressive and rather resilient to market conditions. Over the year 2010, the stock price has ranged from a low of approximately $62.00 to a peak of approximately $71.00. The Net Sales for Clorox come primarily from the Cleaning and Household line of products with the highest growth seen from the International markets. Over the past five years, Clorox has been outperformed by their peers 34% to 27% while outperforming the S&P 500 by a considerable margin.
Clorox is a rather strong performer relative to S&P 500 corporations. A number of financing options are available to the company should a particular financing option becomes attractive for the company. The current financial picture in relation to the macroeconomic outlook finds Clorox with flexibility to choose from either equity or debt financing to further fund liabilities or to grow the company accordingly.
The most appropriate form of financing for Clorox is to consider debt financing via convertible debt. The flexibility of having the exposure of converting the debentures to equity provides flexibility on the books relative to the ratio of debt financing. “Clorox Co., which has been growing rapidly through acquisitions, announced a definitive agreement to buy First Brands Corp. For $1.6 billion plus the assumption of $440 million in debt.” (Anders, Parker-Pope, 1998)
Certainly, the Clorox Corporation has many choices in financing, however, the recommendation is to elect a high debt financing level.
A leading global hospitality company, MGM Resorts is known for breathtaking and elaborative decor within their hotel/casino brand. The customers of MGM Resorts are of all ages and ethnic/cultural backgrounds whom prefer to experience a touch of lavishness while on vacation within Las Vegas, Michigan, or any of the fifteen areas of operation where MGM Resorts can be found. (mgmresorts.com/company/company-overview.aspx)
MGM Resorts specializes in offering a truly transformational experience within their resort/casino type of environment. The company understands how to create an atmosphere where the consumer feels rejuvenated from the experience of the stay or visit. The casino offers a gaming experience where the consumer can enjoy Las Vegas from the comfort of the hotel/resort and casino. In a highly competitive market, MGM Resorts must compete with the Hilton brand and other competitors to attract the consumer to spend at their location.
The major threat to MGM Resorts remains a stagnant global economy. However, MGM is not as susceptible to increases in raw materials as is other businesses in other industries. MGM does have a large energy requirement however, investment into sustainability measures would produce the necessary energy to meet usage requirements. Additionally, a slow global economy prevents consumers from travelling, which lowers overall travellers and therefore reduces the probability of a consumer visiting and spending their disposable income at MGM Resorts.
MGM over the year of 2010 has traded its equity at a range between approximately $9.00 and $15.00. (mgmresorts.investorroom.com) The economic slowdown has hurt the company performance given its historical equity trading price, which was at one time well north of $50.00 per share. Certainly, a low level of debt financing would enable the organization to utilize its low equity market value and will improve the position of the company in the future.
“The Company (MGM Resorts) significantly improved its financial position by extending the maturity of its $3.5 billion credit facility to 2014 and raising and additional $3 billion of debt and equity capital during 2010. In addition, MGM Macau, which is 50% owned by the Company, entered into a new $950 million senior secured credit facility in August 2010 and CityCenter Holdings LLC, which is also 50% owned by the Company, recently extended the maturity of $500 million of its credit facility and raised $1.5 billion of senior secured first lien and second lien notes.” (Banker, 2011)
MGM Resorts has elected to use debt and equity during 2010 along with credit to 2014 to finance expansion and development of holdings. Although a medium level is what is being used here, a greater level of equity financing would make for better sense for future, should the forecast include a global economic rebound.
This is to be interpreted as a lack of faith in a global economic turnaround to the point of stock prices returning to the levels above $50.00 per share, certainly not for the reasons that had the stock there to begin with. The game has changed, and MGM is betting against a large increase in stock price and is playing the dividend and attraction to the value investor.
Abonyi, G., & Slyke, D.M.V. (2010). Governing on the edges: Globalization of production and the challenge to public administration in the twenty-first century. Public Administration Review, 70, S33. Retrieved fromhttp://search.proquest.com/docview/853424044?accountid=13044
Annual Report. Mattel Corporation. http://corporate.mattel.com/annual-report/assets/pdf/MattelAnnualReport2009.pdf
Investor Relations. The Clorox Company. http://investors.thecloroxcompany.com/financials.cfm
MGM Resorts. Company Overview. http://mgmresorts.com/company/company-overview.aspx http://mgmresorts.investorroom.com/index.php?s=122
Nwogugu, M. (2005). Structural changes in the U.S. retailing industry and legal, economic and strategy implications for the U.S. real estate sector. International Journal of Law and Management, 47(1), 65. Retrieved fromhttp://search.proquest.com/docview/196365919?accountid=13044
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