- 43 -
Heebink, “Asset utilization affects earnings growth because a
company with low asset utilization can increase earnings through
more efficient management of assets.” Mr. Engstrom, on the other
hand, made a 35-percent adjustment to the P/E ratio he derived
from the guideline companies to account for the fact that the
average net profit margin of the guideline companies was
approximately 35 percent less than HII’s net profit margin.
According to Mr. Engstrom, “Companies with higher profit margins
tend to have lower price/earnings ratios because it is more
difficult for the company to achieve future growth.” We agree
with respondent that these adjustments were designed to capture
the same thing, HII’s relative difficulty of achieving future
growth.40 Thus, we cannot agree that Mr. Engstrom’s analysis was
flawed in this respect.
40Mr. Engstrom agrees that HII had a higher return on assets
than the guideline companies; this results in greater risk, and
normally this risk translates into a lower price earnings
multiple. However, Mr. Engstrom testified that this “was one of
the primary issues that we addressed when we were looking at an
appropriate price earnings multiple” for HII. He further
testified that he made two adjustments:
One is the adjustment for size, and one’s an adjustment
for other factors. And if you look at the text of our
report, the primary motivation of that other adjustment
factor was the fact that Hess’s profit margins are
higher than the guideline companies’.
So it’s taking account of the fact that their
profitability is higher. And whether you’re measuring
that profitability in terms of profit margins or in
terms of returns on assets, it’s higher, and therefore
we would reduce the multiple.
Page: Previous 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 NextLast modified: May 25, 2011