Travis Perkins Performance in the Main Market - Essay Example

Travis Perkins performance in the main market Contents Part a) 3 The role of the following in the process of transfer 3 al Investors 3 2. Investment Banks  3 2.The Board of Directors 4 Part b) 4 The performance of Travis Perkins 4 Comparison with other companies 8 Conclusion 10 References 12 Part a) The role of the following in the process of transfer 1. Institutional Investors The institutional investors play a major role in the decision of the transfer of a company from the FTSE 250 to the Main Index. They decide on the investment factors and often draw back their investments when the company is evaluated in terms of the parameters of share price, trading volumes, stock price volatility and stock valuation ratios. For Travis Perkins movement into the FTSE 100 in June 2013, the institutional investors played a critical role. The high investments of different investors in this company accelerated the increase of the share prices. Also, the trading volume of Travis Perkins became excessively high which established a strong performance of the company. This facilitated the inclusion of the company in FTSE 100. 2. Investment Banks  The investment banks invested heavily in Travis Perkins due to its strong financial fundamentals and facilitated a noticeable improvement in the performance levels of the company. This resulted in more and more investors including the private and institutional investors to invest in the shares of the company (Shapiro, 2005, p.121). As a result the share prices of the company went up, the trading volume as well as other performance measure metrics for moving into the FTSE 100 became extensively improved. The valuation of the stocks of Travis Perkins went up due to the high support from the investment bankers. As a result of all these factors, Travis Perkins could easily enter into the main index from the FTSE 250. 2. The Board of Directors The Board of Directors of Travis Perkins was extremely efficient in terms of strategic management, succession planning as well as risk management. The Board of Directors of Travis Perkins implemented corporate governance practices and management strategies which influenced better performance of the company. The different corporate restructuring processes followed by the management of the company resulted in the increase in the investor attractiveness for the company (Jennings, 2001, p.4). This resulted in a high volume of trading for the shares of Travis Perkins. The performance levels of the company were improved and the company became financially stronger which influenced the investors to invest their money in the stocks of Travis Perkins. Part b) The performance of Travis Perkins The FTSE 100 includes the top 100 companies measured by the capitalization factor. Whereas the FTSE 250 include the next 250 companies, measured by capitalization in the United Kingdom Market (Fay, 2006, p.114). There may be four different stock movements between the two indexes. These include: Promotion of the company from FTSE 100 to FTSE 250 Promotion of the company from the FTSE small cap to the FTSE 250 Exclusion of the company from FTSE 100 to FTSE 250 Exclusion of the company from the FTSE 250 to the FTSE small cap. The stocks of Travis Perkins displayed all the characteristics features of a company moving from the FTSE250 to the main index (Tulsian, 2002, p.114). The stocks of Travis Perkins outperformed during the Interim period. Also, after the promotion declaration, the stocks of the company levelled off marginally and then dipped which is characteristic of the index after the promotion. The company also experienced an increase in the valuation after the stock was promoted from the FTSE 250 to the higher index of FTSE 100. The price to sales ratio also increases when the stocks move to the senior index. For Travis Perkins also, the price to sales ratio increased after its shift from the lower index to the higher index. Stock Return: The average return on the stocks of Travis Perkins in the period from its inclusion in the main index on 24th June 2013 to 14th February 2014 was 84% which indicated a good level of performance for the company after being promoted from the lower index to the senior index. The average return of 84% indicated that Travis Perkins was performing at a much higher rate than the rate of return measured in the index which was 22%. The beta for Travis Perkins is also high at 1.61 which indicates that the company has multi-fold return as compared to the market returns. Therefore, it was identified that the company started performing at a much higher rate after its inclusion in the FTSE100. But this may have a negative effect on the performance of the company in case the market crashes because the loss would be similarly in huge proportion of the rate of loss in the market (Richard, DeFusco, Dennis, McLeavey and Runkle, 2011, p.119-120) . Stock Volatility: The volatility of the share prices also improved with the movement of the stocks of Travis Perkins into the higher index. Generally, the volatility decreases as the companies move into the higher indices (Stickney, Weil, Schipper and Francis, 2009, p.90). This was also noted in the stock price movements of Travis Perkins from the day of its inclusion in the main index to 14 February 2014 (Financial Times, 2014). The stocks experienced an increase in the volatility of the share prices through the interim period followed by a decrease in the price levels during the promotion period. Stock Valuation: The value of the stocks of Travis Perkins increased after the shift of the company from the FTSE 250 stock index to the FTSE 100 stock index. The share prices rose at a steady rate and the closing price of the market capitalization on 10 February 2014 was £1883. The stocks had an average rate of return of 2% which was much higher compared to the average rate of return for FTSE 100 stocks which was only 1.4% (Yahoo Finance, 2014). The valuation of the stocks of a company increase when the company enters the main index of FTSE100. Travis Perkins also followed the trend and the valuation of the stocks increased. This made the stocks of Travis Perkins much attractive from the point of view of the potential investors. Trading Volumes: The trading volume of the stocks of Travis Perkins increased after its inclusion in the main index. More number of institutional investors started investing in the shares of the company, especially after the company was established as a financially strong organization which followed its movement from the FTESE250 stock index to the FTERSE 100 stock index in London Stock Exchange. All the four performance metrics for the evaluation of the investor attractiveness of the company showed an upward trend (Stephen and Pritchard, 2008, p.451). The trade volumes of the shares of Travis Perkins increased after the promotion phase of its inclusion in the main index. The price to sales ratio or the stock performance ratio also increased steadily after experiencing a dip (Steinberg, 2004, p.32). The share prices of Travis Perkins have constantly being maintained at a high value as compared to the market. The average return from the stocks of Travis Perkins has also been much higher as compared to the average returns from the market. The increase in the rate of return from the stocks of Travis Perkins has made the investors consider the company as a worthwhile option for investment (Simmons, 2003, pp.71-78). This is applicable for both the private and the institutional investors. The inclusion of the stocks of Travis Perkins in the senior index of FTSE 100 resulted in appositive impact on the valuation of the stocks of Travis Perkins (Steinberg, 2004, pp. 60-64). The efficient market hypothesis (EMH) and the prospect theory or loss aversion theories of investment have played a major role in the promotion of Travis Perkins from FTSE250 to FTSE100. Also the different regulations and agreements implemented by the international regulatory bodies like the establishment of the Sarbanes-Oxley Act have also been underlying factors driving the high performance of the company. The major fund managers have included the stocks of Travis Perkins in their investment portfolio to ensure a risk versus return balance. This also helped in creating more trading volumes for the company. The management of Travis Perkins implemented financial decisions according to the expected movements in the market which resulted in creating a higher reliability of the investors on the stocks of Travis Perkins. The market timing of the investments in the stocks of Travis Perkins were appropriate and advantageous for the company. Also the investment strategies employed by the investors to ensure more return from the stocks of Travis Perkins as the company was becoming more popular among the investors. All these factors improved the performance of Travis Perkins and resulted in its promotion from the lower index to the main index in LSE. Comparison with other companies The performance of Travis Perkins with regard to companies such as Royal Mail and Persimmon PLC is considered as quite good. It has an average return of 0.84% against 0.58% of Permission PLC and 0.40% of Royal Mail. It also has a higher average return as compared to the market index FTSE 100. FTSE 100 has a return of 0.22% in this regard (Cuthbertson and Nitzsche, 2008, pp. 28-31). It can be seen from the above graphs that Travis Perkins is much more efficient than other companies with regard to its performance. The higher average return of Travis Perkins PLC with regard to its competitors such as Royal Mail and Persimmon PLC clearly demonstrates this fact. It also has surpassed the average market index return of 0.22% with respect to its average return. The standard deviation of the company is also very low as compared with its competitors (Bodie, Kane and Marcus, 2008, pp. 32-35). It has a standard deviation of 0.03% against 0.04% of Persimmon PLC and 0.03% of Royal Mail. This implies that the company’s risk factor is also quite low. A low standard deviation is required by a company as it signals low risk for a company. Standard deviation is the measure of the underlying risk in investing in a particular stock. Hence less the value of standard deviation, the better it is for a particular company (Cecchetti, 2006, p. 76). This risk factor is commonly measured by the variance or the standard deviation. The coefficient of correlation between Travis Perkins PLC stock’s return and the market return is 0.67 against 0.45 of Persimmon PLC and 0.25 of Royal Mail. The coefficient of correlation indicates the similarity or dissimilarity in the behaviour of stock returns and the market index returns. A correlation coefficient of -1 indicates that there is a perfect negative correlation and that the stock returns and the market index returns move in the opposite direction. If the correlation coefficient is one, it indicates that there is a perfect positive correlation between stock returns and the market index returns and that both the returns move in the same direction. If the correlation coefficient is zero, it indicates that there is no correlation between stock returns and the market index returns (Matthews and Thompson, 2005, p. 81). The correlation coefficient of 0.67 for Travis Perkins PLC indicates that its return is more closely related with the market index return as compared to its competitors. The beta for Travis Perkins PLC is 1.61 against 1.43 of Persimmon PLC and 0.59 of Royal Mail. Beta signifies the relationship between stock return and the market index return. It signifies that for 1% change in the market index return there would be β% change in the price of the stock (Maude, 2006, pp. 79-82). Therefore it is considered that more the value of beta, the better it is for a particular company’s stock. The stock of Travis Perkins PLC has the highest positive beta of 1.61 and hence it is considered better than its competitors. Conclusion Though the London Stock Exchange is used as a single stock market, yet it can be segregated into different components including the FTSE 250, FTSE 100, FTSE mid cap, FTSE small cap etc. The companies that are included in the main index of FTSE 100 generally have a better rating than the companies whose stocks are listen in FTSE 250 (Bain, 1996, p.78). Travis Perkins could be performing better even when it was listed in the FTSE 250. This is because the absolute stock price movements are similar in FTSE 100 and FTSE 250. But the stock price movements that are related to exclusion are greater in FTSE 250. The stocks of Travis Perkins experienced lesser volatility i.e. the price movements became less fluctuate once it was included in the main index. This is because the volatility of the stocks tend to decrease as the level of the stock index in which it is included increases (Trainer, 2006, pp.321-324). The stocks of Travis Perkins had a greater scope of performing better when included in the main index because the stocks increase highly in valuation when they are included in the FTSE 100 (Lawton and Jankowski, 2009, p.14). This increase in valuation is more than the decrease in valuation when the stocks are excluded from the FTSE 100. This gave Travis Perkins a better scope of performing. The company also focused more on performance because the maintenance of the inclusion in the FTSE 100 stock index is more critical than the initial promotion of the stocks into the main index (Ranghanatham, 2006, p.167). References Bain, W. 1996. Investment Performance Measurement. Cambridge: Woodhead. Bodie, Z., Kane, A. and Marcus, A.J., 2008. Investments, 7th ed. New York: McGraw-Hill. Cecchetti, S. G., 2006. Money, Banking & Financial Markets. New York: McGraw-Hill. Cuthbertson, K. and Nitzsche, D., 2008. Investments, 2nd Ed. New York: Wiley. Fay, J. 2006. Contemporary Security Management. Oxford: Butterworth-Heinemann. Financial Times. 2014. Travis Perkins Plc. [Online]. Available at http://markets.ft.com/research/Markets/Tearsheets/Summary?s=TPK:LSE. [Accessed on 27 February 2014]. Jennings, A. 2001. Financial Accounting Management. Stamford: Cengage Learning. Lawton, P. & Jankowski, T. 2009. Investment Performance Measurement: Evaluating and Presenting Results. New York: John Wiley & Sons. Matthews K. and Thompson, J., 2005. The Economics of Banking. New York: John Wiley & Sons. Maude D., 2006. Global Private Banking and Wealth Management. New York: John Wiley & Sons. Ranghanatham, M. 2006. Investment Analysis and Portfolio Management. Boston: Pearson Hall. Richard, A., DeFusco, C., Dennis W., McLeavey, T., & Runkle, E. 2011. Quantitative Investment Analysis. New York: John Wiley & sons. Shapiro, A. 2005. Capital budgeting and investment analysis. New Jersey: Pearson Hall. Simmons, M. 2003. Securities Operations: A Guide to Trade and Position Management. New Jersey: John Wiley & sons. Steinberg, M. 2004. Securities Regulation. New Jersey: LexisNexis. Stephen J. C. & Pritchard, A. 2008. Securities Regulation. Colorado: Aspen. Stickney, C., Weil, R., Schipper, K. & Francis, J. 2009. Financial Accounting: An Introduction to Concepts, Methods and Uses. Stamford: Cengage Learning. Trainer, E. M. 2006. Using Economic Indicators to Improve Investment Analysis. New York: John Wiley & Sons. Tulsian. M.P. 2002. Financial Accounting. Boston: Pearson Education. Yahoo Finance. 2014. Travis Perkins PLC (TPK.L). [Online]. Available at http://uk.finance.yahoo.com/q?s=TPK.L. [Accessed on 27 February 2014]. Read More