LENOVO STOCK REPORT Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

lenovo stock report Case Solution

Scenario 4

The fourth scenario on which, we have concluded that the Lenovo stock is undervalued is the current market price of Lenovo’s’ stock is $15 and the target price calculated through discounted cash flow valuation id $60 at an annual growth rate of 5% and a weighted average cost of capital of 10% for the FY20. The higher intrinsic value of Lenovo’s stock is an indication that the company’s cash flows have a greater value than the market price of the company, due to which, it is concluded that the stock is undervalued and the investors should buy it.

Catalysts

Supply Chain Management – Lenovo’s effective supply chain management strategies has helped company even in uncertain economic and political conditions caused by the Covid-19 outbreak. The company purchases only the good quality raw material from its branded, thereby providing the best quality product to its high end customers as well as the normal consumers. The company demands from its suppliers to provide the raw material under the OHS AS 18001 certification, in order to ensure the quality and safety of the provided material. Moreover, during this pandemic situation; the company has been putting tremendous efforts in shifting its facilities from China, to meet the growing consumer demands.
International Presence – The Company is maintain high sales and profitability levels due to its presence in 160 countries of the world. Its leading market is China, but other major revenue sources included the Unites States of America and the Asia Pacific market. Due to the quality products; the Lenovo products are in high demand among different parts of the world.
Fast Growing Personal Computer Maker –Lenovo Company is the fastest growing PC manufacture in the PC market. Being a young company, it has expanded its foot print internationally through PC solutions with high product quality, design and affordability. The Lenovo Company had a market share of 23.4% in FY19, according to annual report 2018, and it remained the fastest growing company in the same year.

Valuation

The target price for Lenovo Company is determined using the discounted cash flow model (DCF). According to the analysis, a growth rate of 5% in company’s cash flows is assumed, according to a compounded annual growth rated based on the company’s sales historically. The discount rate is assumed to be 10%. 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.

Risks

à Decreased Customer demand – Due to Corona virus outbreak, the Lenovo Company is facing a decrease in demand by the customers. It is because due to strict lock- downs imposed by the governments in different countries, the demand for Pcs has increased drastically by the remote workers and by the online class rooms. The demand is so high making it a challenge for the PC market to meet such high levels of demand. Similarly, the Lenovo’s manufacturing operations stopped for almost quarter in Wuhan, ultimately leading to production shortages. Due to these shortages, Lenovo has decline in shipping volumes, which led to a rise in logistics and shipping costs, thereby reducing the demand from customers and company’s profitability. In this corona outbreak, customers including enterprises and other consumers are trying to have extended life cycles of PCs, due to growing economic uncertainties caused by the pandemic.

à Rising Prices and Shipping freight Costs - The Company has faced a sharp decline especially in its mobile and data center segments, because of the increase in shipping costs and prices of the products. Overall, the shipments for PC declined by 12.3% in the first quarter of FY20 as compared to FY19 (STAMFORD, 2020). The Personal computer market faced a high decline since 2013, after achieving a growth for 3 consecutive years.

à Rearranging supply chain – The Company has been looking for increasing its supply chain facilities outside the China’ facility as its major production facility in Hubei province has remained shut down after the outbreak. The targeted locations for the increased production include United States of America, India, Brazil and Mexico. Apart from Lenovo, other personal computer manufacturers have arranged their supply chain facilities due to stopped production levels in China i.e., 92.1% of PC imports were sourced from China in 2019 (Rogers, 2020)......................

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LENOVO STOCK REPORT Harvard Case Solution & Analysis