Owen’s Precision Machining Credit Analysis
* Business and Strategy
OPM is a fifteen-person machine shop that makes customized metal parts and integrated subassemblies for a variety of end uses. Found in 1986, it now locates on the first floor of a converted textile factory next to the Merrimack River in Lawrence, MA.
The A/P term of OPM is net of 30. And here is the 5-forces analysis:
* The power of suppliers: Strong
Most of the raw materials OPM needs are differentiated, rare and hard to source. They need long lead times and large minimum order quantities. And to form competitive advantage, OPM needs to store a lot. In order to mill good products, OPM needs specific ...view middle of the document...
* Intensity of competitive rivalry: Medium
The demand for precision machined parts customized has lead to high industry growth rate. OPM itself finds out that the orders grow so fast that it is hard to meet the needs. Besides, since the capital expenditure is not large, the exit barriers are low. However, there are many similar shops that can provide same products for the buyers. As a result, I conclude that the intensity of competitive rivalry is medium.
OPM is a typically family-owned small shop. The current president Christopher Owen acquires the company directly from his father. As a quite reliable person, Mr. Owen has fully control on the fifteen-person shop. The ownership concentration is high and a minority shareholder is Bob Benson, a good friend of Mr. Owen, who has made $140,000 investment on preferred stocks since 2010. Bob Benson doesn’t involve in the business of OPM.
* Financial Condition
* Income Statement
The profitability ability is very stable in recent years. In 2011, the sales growth rate boosted from 5.0% to 17.0% due to the recovery of economy. It further increased to 23.0% in 2012 and then will be stable at 20.0% as projected in 2013 and 2014. The projected NPAT/Sales and gross profit margin will be 4.0% and 34.0% in 2013 and 3.8% and 34.0% in 2014, which are quite close to the historical average of 3.9% and 34%.
* Balance Sheet
The current ratio reached its historical highest of 7.5 in 2011 but it soon declined to 6.2 in 2012. Quick ratios were both 1.9 in 2010 and 2011, and it declined to 1.5 in 2012. Both current ratio and quick ratio shows that liquidity ability is quite good historically. In the future, OPM’s current ratio will be 7.0 and quick ratio will be 1.8, and we can conclude that the liquidity ability will continue to be healthy.
From 2010 to 2012, although OPM was accumulating larger inventory, the operating cycle and cash cycle are shorter annually. Days receivable declined from 46.0 to 44.0 days and days inventory declined from 230.8 and 218.9. In the following two years, the projected average days receivable will be 45.6, days inventory will be 221.4 and days payable will be 19.3 days. We find out that they are all in the historical range.
Debt/TNW was 0.73 on average in the past. The total debt will increase to $823,000 in 2013 and $1040, 000 in 2014.The Debt/TNW will thus increase to 1.0 in 2013 and 1.1 in 2014, however, the leverage level is still very safe.
The interest expense will be 52.0 and 65.0 in 2013 and 2014, and the EBIT/interest will be 3.5 and 3.4 accordingly. The coverage ratio is quite close to the historical level,...