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Parsimonious Forecasting

Parsimonious Forecasting

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Parsimonious Forecasting

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  1. Parsimonious Forecasting Intercontinental Hotel Group IHG Julia Lassarat February 3, 2014

  2. Overview • Industry and Firm Introduction • Overview of Forecasting • Disaggregating RNEA • Forecasting Sales, EPAT, and NEA

  3. Industry Overview • Resilient industry in the face of slowing economic pace • Revenue per available room (RevPAR) is standard performance metric • RevPAR was up 4.5% in 2012 in comparison to 5.9% in 2011 • Highly competitive market • The global hotel market is estimated to be 21.5 million rooms • 7.5 million of these are branded hotel rooms Source: IHG 2012 Annual Report

  4. Top Ten Hospitality Trends Expected in 2014 • Millennial customer base • Increased need for speed/ precision • “WOW” customer service • Increased leadership involvement • More international/leisure visitors • Social Media/Mobile Phone symbiosis • Content marketing will replace traditional ads • Renewed focus on property websites • Increased attention to review sites • Reputation Management Source: Hotelnet.com

  5. Intercontinental Hotel Group (IHG) • SWOT Analysis • Company Life Cycle

  6. SWOT Analysis Internal Factors External Factors Positive Factors Negative Factors

  7. Life Cycle Stage: Mature Operating Investing Financing

  8. Overview of Forecasting • Optimistic v. Conservative • Make a bad decision or miss a valuable opportunity? • Forecasts of Revenue, EPAT, and NEA are linked in the same way as historical Revenue, EPAT, and NEA • Heavily rely on firm/industry-specific assumptions

  9. Disaggregate Return on NEA (RNEA) • RNEA= EPAT/avg(NEA) • IHG has surprisingly high RNEA • Average EPAT, but low NEA

  10. Disaggregating Return on NEA (RNEA) • RNEA=EPAT/avg(NEA) =EPAT * Sales Sales avg (NEA) RNEA= EPM*EATO

  11. Enterprise Profit Margin • How much operating profit the firm earns from each dollar • The higher, the better • Affected by • Product prices • Manufacturing costs • Wages • Industry competition

  12. IHG’s Annual EPM • Enterprise operations’ profitability are fairly stable • EPAT only includes EPAT from sales

  13. Enterprise Asset Turnover • Measures productivity of firm’s enterprise assets; how much in sales is generated per dollar of investment • Most easily increased by reducing working capital • Reducing capital assets is more difficult

  14. IHG’s Annual EATO • Relatively stable over three years • Exceeds 1.40 median of publicly traded firms

  15. Tradeoff Between EPM and EATO • Capital Structure has an opposite effect on EPM and EATO • Capital intensive firms often have low EATO but require a higher EPM • One cannot compare only a firm’s EATO or only a firm’s EPM to comparable companies

  16. Forecasting Using Sales Growth, EPM, and EATO • Forecast revenues via forecasts of sales growth rates • Forecast EPAT via forecasts of EPM • Forecast NEA via forecasts of EATO

  17. Forecasting Revenues • 5.50% Assumption

  18. Forecasting EPM • 28% Assumption

  19. Forecasting EATO • 1.67 Assumption

  20. Parsimonious Assumptions • Sales Growth Rate: 5.50% • EPM: 28% • EATO: 1.67

  21. Questions?