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LENOVO STOCK REPORT Case Solution & Answer

lenovo stock report Case Solution

Summary

The Lenovo’s free cash flows (see Appendix A), are discounted at 10% rate, which resulted in an enterprise value of $1,379,460 for the FY20. The number of outstanding shares of the company are used to calculate the per share target price of $60. The market price for the Lenovo’s stock is $15, which is less than the intrinsic value calculated from the discounted cash flow valuation. The valuation suggests that the stock is undervalued, and it is recommended to buy the Lenovo’s stock and hold it for a longer span of time, as the company has huge growth potential due to its strong product quality, product design and affordability features, offered to its consumers and high end enterprises’ target markets.

Background

Lenovo Company was incorporated in China, at a guardhouse in 1984. The initial investment made in formation of the company totaled CNY 200,000 i.e., $25000.Afterwards, in 1988, the company started its operations in Hong Kong and within a span of 8 years; it had the status of the largest Personal Computer Company in China. The company was named “Lenovo” in 2004. Currently, the company has the market capitalization of $46 billion with approximately 52000 employees. The products offered by the company include: workstations, smart TVs, smartphones, servers, IT solutions etc. The company has its global presence in 160 countries of the world and it is ranked 2226 by the Forbes 500 company list.

On February 20, 2020; the Lenovo Company reported a $14.1 billion high revenue and a consecutive 10th year on year quarter growth (News Lenovo, 2020). Due to the Covid-19 outbreak, the industry was facing acute supply shortages along uncertain geopolitical environment, but still the Lenovo Company delivered strong financial results. The company’s income before tax had a growth year on year quarter growth of 11% and it reached t0 $390 million, the net income reached $258 million with a year on year quarter growth of 11% and the EPS for the year was $2.16 for the third quarter of its fiscal year.

However, the 2020’s fiscal year has been challenging for Lenovo Company, due to Corona virus outbreak. In its fourth quarter of the FY20, the company’s net income declined by 64% and the sales revenue decreased by 10%, as compared to FY19. The company’s mobile segment got severely impacted by the Covid-19, due to the shutdown of its smartphone factory in Wuhan, for almost a quarter.

Investment Thesis

By using the current market value estimates and current valuation techniques, it is concluded that the company’s share priceis undervalued,which reached to the conclusion that the investors should buy the security in the current period and in further they should hold it for the longer-term period. The reason behind the holding of the Lenovo stock is presented in the following four scenarios which are used to reached at the conclusion.

Scenario 1

The first scenario on which, we have concluded that the Lenovo stock is under valued is the comparison of company’s growth rate with the market growth rate. As shown in Appendix 2 of the document that the:

à Industry growth rate is 29.4 %.

à While, the company’s growth rate is 66.06 %.

The higher company’s growth rate indicates that the performance of the company as compared to the industry, is quite high, which shows that the shares values of the company must be greater than the other competitors or the industry average.

Due to the epidemic disease in the global world; the company’s sales as well as the industry have fallen in the financial year 2020 as compared to the financial year 2019, which is indicated as the negative growth in the year 2020 as compared to the year 2019. This negative growth rate does not mean that the company’s performance has adverse as compared to the industry average, but due to the epidemic disease and global financial crises; the sales are fallen for the Lenovo and its respective industry, such as: the technological industry.

Scenario 2

The second scenario on which, we have concluded that the Lenovo stock is undervalued is the market share of Lenovo. The market share of Lenovo is mostly continuously increasing in each quarter since the quarter 1 of the year 2009 to the quarter 3 of the year 2020 (except the small inceptions and epidemic disease and global financial crises). This increase in market share shows that the company’s market share is increasing its total sales ratio with the industry is increasing, so it is the positive sign for the company, which shows that the share price of the company will be high as compared to the industry average share price. This scenario helps to indicate that the share price of Lenovo is undervalued.

Scenario 3

The third scenario on which, we have concluded that the Lenovo stock is undervalued is the financial ratios such as the return on equity and dividend yield is higher than the industry average which indicates the earning of the company is greater than the industry average. So, it is concluded that the Lenovo stock is undervalued because its earrings and other things are higher than the industry average………………….

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