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Van Houtte Valuation 2004

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Essay title: Van Houtte Valuation 2004

1) Van Houtte is a publicly traded company, listed on the Toronto Stock Exchange under the symbol VH. The company, which was established in 1919 by Albert-Louis Van Houtte, competes in the Consumer Products (Food Processing) industry and is engaged in the packaging, roasting, distributing, and marketing of gourmet coffees to is office coffee services (OCS) networks, cafes, and hotels, restaurants, and institutional channels (HRI). The companyЎЇs services network is comprised of 35 and 33 corporate branches in Canada and United States respectively. In addition, the Montreal-founded business has 19 franchised branches south of the border and employs around 1800 people in Canada, United States and Eastern Europe. The company also manufactures and designs coffee brewers and equipment through the aid of its subsidiaries, VKI Technologies and Keurig Inc.

ASSETS - On-balance sheet items

2) BUSINESS/OPERATING RISKS

Van HoutteЎЇs primary product is coffee, a commodity vulnerable to considerable price fluctuations. Any large upward price swings in the price of green coffee may limit Van HoutteЎЇs ability to pass these price increases on to consumers. However, since Van Houtte specializes in gourmet coffee, unlike traditional coffee, its main customer base does not generally buy based on price, thus making the companyЎЇs price sensitivity less pronounced.

Since Van HoutteЎЇs uses coffee beans to produce its finished product and distribute it to the customers, the quality of raw inventory plays an important part in delivering a satisfactory product to the customer. Van Houtte will likely be expanding into geographic markets in which it has no real previous operating experience, and thus there can be no assurance that such diversification will translate into profitable operations. Vietnam, for instance, is considered the fourth-largest coffee producer, but the quality of its coffee is questionable. Weather conditions in the regions where coffee grows can also affect the supply of inventory and its quality. Furthermore, unseasonably warmer weather in consumer markets typically lead to reduced coffee consumption, and thus reduced sales.

There are also social and political factors (general economic conditions) that are involved with the processing and distribution of coffee beans. Some trade barriers or potential for new tariffs could increase the cost of Van HoutteЎЇs inventory. If there is a social upheaval or uncertainty (political unrest, ie. war) in one of the major 10 suppliers in the industry, then a shortage of supply can arise, causing prices to increase. In particular, Brazil, Columbia and Indonesia produce roughly 57% of the worldЎЇs coffee supply. Therefore, the stability of these three producers poses the greatest risk to the coffee industry and thus Van Houtte.

Furthermore, the state of the economy and the consumerЎЇs desire to intake coffee can have an impact on the companyЎЇs existence. If the inflation rate and unemployment rate begins to rise, consumers of this Ў°luxuryЎ± good will likely reduce their consumption as more of their disposable income will be spent on necessities. Furthermore, since Van HoutteЎЇs coffee services account for nearly 60% of the companyЎЇs total sales, a downturn in the North American economy will have a proportionate negative impact as consumerЎЇs willingness to spend drops. Consumers could then reserve to drinking coffee at home since it is less expensive. Ў°Coffee services sales are sensitive to fluctuations in the labour market, particularly in the services sector.Ў±

Van Houtte is also susceptible to foreign exchange risk. Fluctuations in the exchange rates may affect the companyЎЇs overall margins to the extent of its unhedged position. For example, over the last fiscal year the U.S. dollar lost an average of 13% to the Canadian dollar, which negatively impacted U.S. sales and operating income.

Finally, the competition poses a risk to the company. Van HoutteЎЇs whole bean coffees compete directly with specialty coffees sold at retail through supermarkets, and a growing number of specialty coffee stores (ex. Second Cup, Starbucks). In nearly all markets in which the company operates there has been a significant increase in competition due to the low barriers to entry and the historically low price of green coffee beans.

3) Operating and Cash Cycle

a) Average collection period = average receivables/average daily sales

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