Stock valuation refers to the processes involving the determination of the current monetary worth of a given company based on its projected future cash flow. This is done by comparing cash flow patterns associated with the company, by analyzing its book value, Market value and intrinsic value otherwise referred to as economic value.
In Stock valuation, there are two categories of valuation models; absolute valuation model which reflects the intrinsic value of the stock and the relative valuation model which compares the company to other comparable companies. The comparison variations among the market value, intrinsic value and the book value enable one to determine whether the stock is overvalued or undervalued. Only after this can one decide on whether to purchase the stock or not. In this case, we seek to conduct a fundamental analysis of the Nissan Company with a focus on the possibility to purchase its stock (Johnson, 86).
Nissan Motor Company was established in the year 1933 as the pioneer in automobiles with its headquarter is in Yokohama, Japan (Fahri and Johnson, 32). It was then called Jidosha Seizo Company Limited. It changed its name to Nissan a year later after the completion of the Yokohama Plant and thereafter transformed into an integrated factory for automobile manufacture, the first of its kind in Japan.
The company has spread its subsidiaries worldwide over the past seven decades. Currently, it is the world’s second automobile producer after Toyota Company. It makes an annual production output of approximately 4.9 percent of the global automobile output. Fahri and Johnson explain “As an automotive firm, it deals with the design and manufacturing and of course sales of automotive products as well as related accessories, services and parts.
With the global recession and the fall in Dollar value against the Japanese Yen in the 1990s, Nissan Company began to realize financial depression since their sales in the American Market drastically dropped (102). Nissan Motor Company Limited registered its stock in the Tokyo Stock Exchange in 1951; nonetheless, its stock has not been consistent in growth due to fluctuation in levels of profitability since its registration.
The fall prompted the discontinuation of vehicle production in some of its subsidiaries such as the Zama and Murayama Plant. Investors’ confidence was reduced due to the fluctuation of its share prices. This study undertakes to determine its current Market position by comparing its value investment and growth investment perspectives, and the rationale of buying its stock.
Different categories and styles are used do distinguish between the mode of investment of a particular stock. It is however, misleading to imagine that classification of any stock can be accurate and consistent. Miller and Larry defines Value investor as an investor who lays more emphasis on the price of a stock and gets attracted to the lower prices to establish the preferred stock. In essence, these investors are speculators, who rely on high cash flow stocks (86).
Growth Investor on the other hand, focuses on the legacy of growth a company has and the average growth rate per annum. There is little concern over its current market price for a growth investor. They capitalize on the notion that the stock has exhibited above average growth in the past. They then assume that there is high prospect of it growing in the future thus guaranteeing high dividend return. Nissan Motor Company would be classified as value oriented stock rather than growth investment and would be preferred by short term speculators.
This is because Nissan Motor Company has deteriorated in its profitability and cash flow, repeatedly recording enormous losses for example, in 1994 it recorded a loss of USD 2.0 Billion and USD 3.2 Billion in 1996. Only after merging with Renault in 1999, did Nissan regain its cash flow and increase sales volume thus benefitting from leverage (Miller and Larry, 130).
We find in Eades et al that, intrinsic value of a stock is the actual asset value with respect to its current true value of the enterprise. Since it is based on both real and virtual factors, in many cases it differs from the market value of business at any moment (48). Intrinsic value of a stock varies from time to time therefore; it is never constant at any one time (Eades et al, 102). For Nissan currently will be computed using Dividend Discounting Model DDM as stated below:
Intrinsic Stock (P) =D/ (K-G)
Where P is the intrinsic stock value, D is the expected dividend per share in one year’s time from now, K is the required return for equity Investor and G is the perpetual dividend growth rate. Now for Nissan currently, K=13.8%, G=1.6% and D is USD 213.99 per share.
P= 213.99/ (13.8-1.6)
P= 213.99/12.20
P= USD 17.54 per share.
This value is only based on the current variables. This is bound to change depending on the investors’ perspective from time to time. Anything is possible; it may grow higher or even diminish further.
Fundamental analysis is usually used to determine whether a particular stock is under or overvalued. It follows standard criteria as illustrated below:
- When Market value exceeds intrinsic value then the Stock is overpriced
- When Market value equals to intrinsic value then the Stock is normally priced
- When Market value is less than intrinsic value then the Stock is underpriced
The current market price for Nissan Stock is at USD 18.98 per share. It is therefore, clear here that the intrinsic value is less than the market value so the conclusion is that Nissan stock is overvalued (Miller and Larry, 136). A speculator would in this case be advised to study the variation between these two values before making a move purchase this stock. Conversely for a growth investor, this does not determine his or her decisions.
Following the realization of the stock value of Nissan Motor Company stock, I hold reservations about a value investor willing to buy stock at such an overpriced value. As a matter of fact, it is advantageous to the seller than for a buyer. In my perspective, this is not the preferred stock currently until the reverse happens or unless one is a growth investor. This is because the stock has a hidden growth potential with long term dividend return.
Nissan has survived in much economic turmoil. At sometimes, the company’s growth declines, and sometimes it grows. The company grew and started trading in stock market. Its stocks perform averagely in the market. The computation of stock value is done using a combination of multiple models. This is to ensure that all avenues are exhausted in determining and making comparisons of ratios generated by the various m models. This would ensure accuracy because one model would act as a control tool for the other in order to produce realistic figures.
Works Cited
Eades, Kenneth, et al. The Portable MBA: Nissan Shares Trading. New York: John Willey & Sons, 2010. Print.
Fahri, Stephane and, Johnson Richard. Renault, Nissan to cut dealer. South America: Trade Publication, 1999. Print.
Johnson, Richard. Nissan Loss Widens to Nearly $2 Billion. Tokyo: Automotive News. 1994. Print.
Miller, Lowry and, Larry Armstrong. Will Nissan Get It Right This Time? After a Decade of Trouble. The Carmaker Is Making Major Changes Business Weekly, 1992. Print.