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Equity Analysis and Valuation of Myers Industries, Inc.

Finance 3321-001

Pranav Gupta

Elizabeth Russell William Olsen

Obadiah Carrillo

Pedro Parra Vazquez

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Contents Executive Summary ....................................................................................................................................... 1

Industry Overview ..................................................................................................................................... 2

Porter’s Five Forces Model ....................................................................................................................... 2

Accounting Analysis .................................................................................................................................. 3

Financial Analysis ...................................................................................................................................... 4

Valuation Summary ................................................................................................................................... 5

Overview of the Firm .................................................................................................................................... 6

Rivalry Among Existing Firms ........................................................................................................................ 9

Industry Growth ........................................................................................................................................ 9

Concentration ......................................................................................................................................... 10

Differentiation ......................................................................................................................................... 10

Switching Costs ....................................................................................................................................... 11

Scale Economies ...................................................................................................................................... 11

Fixed-Variable Costs ................................................................................................................................ 12

Excess Capacity ....................................................................................................................................... 12

Exit Barriers ............................................................................................................................................. 13

Conclusion ............................................................................................................................................... 13

Threat of Substitutes................................................................................................................................... 14

Relative Price Performance ..................................................................................................................... 14

Buyer's Willingness to Switch ................................................................................................................. 14

Conclusion ............................................................................................................................................... 14

Threat of New Entrants ............................................................................................................................... 14

Economies of Scale ................................................................................................................................. 15

First Mover Advantage ............................................................................................................................ 16

Distribution Access .................................................................................................................................. 17

Relationships ........................................................................................................................................... 17

Legal Barriers .......................................................................................................................................... 17

Conclusion ............................................................................................................................................... 18

Bargaining Power of Suppliers .................................................................................................................... 18

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Switching Costs ....................................................................................................................................... 19

Differentiation ......................................................................................................................................... 19

Importance of Product for Costs and Quality ......................................................................................... 19

Conclusion ............................................................................................................................................... 20

Bargaining Power of Customers.................................................................................................................. 20

Switching costs ........................................................................................................................................ 20

Differentiation ......................................................................................................................................... 20

Importance of Product Cost and Quality ................................................................................................ 21

Number of Buyers ................................................................................................................................... 21

Volume per buyer ................................................................................................................................... 21

Conclusion ............................................................................................................................................... 22

Industry Classification on the Five Forces Analysis ..................................................................................... 22

Key Success Factors for the Industry ...................................................................................................... 22

Firm Competitive Advantage .................................................................................................................. 24

Customer Service .................................................................................................................................... 24

Product Quality ....................................................................................................................................... 24

Research and Development .................................................................................................................... 24

Identifying Key Accounting Policies ............................................................................................................ 24

Type One Key Accounting Policies .......................................................................................................... 25

Customer service .................................................................................................................................... 25

Product Quality ....................................................................................................................................... 26

Research & Development ....................................................................................................................... 26

Type Two Key Accounting Policies .......................................................................................................... 27

Foreign Exchange Risk ............................................................................................................................. 27

Goodwill .................................................................................................................................................. 28

Operating Leases ..................................................................................................................................... 28

Conclusion ............................................................................................................................................... 29

Assessing Degree of Potential Accounting Flexibility ................................................................................. 29

Capitalization of Operating Leases ......................................................................................................... 30

Goodwill .................................................................................................................................................. 30

Conclusion ............................................................................................................................................... 32

Evaluation of Actual Accounting Strategy ................................................................................................... 32

Accounting for Operating Leases ............................................................................................................ 32

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Conclusion ............................................................................................................................................... 33

Quality of Disclosure ................................................................................................................................... 34

Economies of scale .................................................................................................................................. 35

Goodwill .................................................................................................................................................. 35

Operating Leases ..................................................................................................................................... 35

Conclusion ............................................................................................................................................... 36

Identifying Potential Red Flags ................................................................................................................... 36

Fourth Quarter Adjustments................................................................................................................... 36

Goodwill .................................................................................................................................................. 36

Restructuring Expenses ........................................................................................................................... 36

Conclusion ............................................................................................................................................... 37

Undo Accounting Distortions ...................................................................................................................... 37

Operating Leases ..................................................................................................................................... 38

Goodwill .................................................................................................................................................. 38

Financial Statements ............................................................................................................................... 38

Balance Sheet .......................................................................................................................................... 38

Income Statement .................................................................................................................................. 41

Conclusion ............................................................................................................................................... 42

Financial Analysis ........................................................................................................................................ 42

Liquidity and Operating Efficiency Ratios ............................................................................................... 43

Current Ratio ........................................................................................................................................... 43

Quick Asset Ratio .................................................................................................................................... 44

Inventory Turnover ................................................................................................................................. 45

Accounts Receivable Turnover................................................................................................................ 46

Working Capital Turnover ....................................................................................................................... 47

Cash-to-Cash Cycle .................................................................................................................................. 48

Liquidity Analysis Conclusion .................................................................................................................. 49

Profitability Ratios ....................................................................................................................................... 49

Annual Sales Growth ............................................................................................................................... 49

Gross Profit Margin ................................................................................................................................. 50

Operating Profit Margin .......................................................................................................................... 51

Net profit Margin .................................................................................................................................... 52

Asset Turnover ........................................................................................................................................ 53

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Return on Assets ..................................................................................................................................... 54

Return on Equity ..................................................................................................................................... 55

Profitability Ratio Analysis Conclusion .................................................................................................... 56

Capital structure Ratios ............................................................................................................................... 56

Debt to Equity ......................................................................................................................................... 56

Times Interest Earned ............................................................................................................................. 57

Altman’s Z-score ..................................................................................................................................... 58

Internal Growth Rate .............................................................................................................................. 59

Sustainable Growth Rate ........................................................................................................................ 60

Conclusion ............................................................................................................................................... 61

Financial Forecasting ................................................................................................................................... 61

Income Statement .................................................................................................................................. 62

Dividends Forecasting ............................................................................................................................. 65

Balance Sheet .......................................................................................................................................... 65

Statement of Cash Flows ........................................................................................................................ 70

Cost of Capital Estimation ........................................................................................................................... 72

Cost of Debt ............................................................................................................................................ 72

Cost of Equity .......................................................................................................................................... 72

Backdoor Cost of Equity .......................................................................................................................... 75

Weighted Average Cost of Invested Capital ........................................................................................... 76

Conclusion ............................................................................................................................................... 77

Method of Comparables ............................................................................................................................. 77

Trailing P/E Ratio ..................................................................................................................................... 78

Price to Earnings (Forward) .................................................................................................................... 78

Price to Book Ratio .................................................................................................................................. 78

Price to Book Multiple ............................................................................................................................ 79

Dividend to Price Multiple ...................................................................................................................... 79

P.E.G. Multiple ........................................................................................................................................ 80

Enterprise Value/EBITDA ........................................................................................................................ 80

Intrinsic Valuation Models .......................................................................................................................... 80

Discounted Dividends Model .................................................................................................................. 81

Discounted Free Cash Flow Model ......................................................................................................... 82

Residual Income Model .......................................................................................................................... 83

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Abnormal Earnings Growth Model ......................................................................................................... 84

Long-Run Residual Income Model .......................................................................................................... 85

Final Recommendation ............................................................................................................................... 87

Sources: ..................................................................................................................................................... 101

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Executive Summary

Analysis Recommendation: Sell (Overvalued)

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Industry Overview

Firms that operate in the Rubber & Plastics industry employ a mix of cost leadership and differentiation competitive strategy. In this industry, cost leadership is driven by economies of scale, efficient production, and tight cost control systems. Differentiation is driven by product quality, research and development (R&D), superior customer service. To properly identify and analyze an industry that is this particularly varied in size, products, and company structures, a Porter’s 5 force analysis has been conducted for the industry.

Porter’s Five Forces Model Porter’s Five Force Analysis is a powerful framework used to analyze levels of

competition in a particular industry. This tool uses 5 forces to examine the likelihood of profitability and determine competitive power. According to Michael E. Porter, author of The Five Competitive Forces That Shape Strategy, the factors that are most closely correlated to industry competition and profitability are rivalry among existing competitors, threat of new entrants, threat of substitute products or services, bargaining power of suppliers, and bargaining power of customers. The analysis of these five components will help potential investors fully understand weaknesses and strengths within the industry. We have analyzed each of these factors and measured them in high, mixed, and low terms. This analysis will provide a substantial basis to evaluate stock worth and profitability based on the competitive nature within the industry.

Figure (1) Porter’s Five Forces Diagram for Myers Industries Inc.

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The rubber and plastics industry has a high level of potential products that are considered as substitute products. With the industry’s low relative price performance due to low profit margins and its high willingness to switch based on low customer loyalty we can assume that within the industry there are a considerable amount of alternatives for customers. We established that there was a low bargaining power of customers within the industry. Despite the high volume per buyer often found within the rubber and plastics industry, the low to moderate switching costs, high product differentiation, and high importance of product cost and quality gives customers little to no ability to bargain. Even though price bargaining may be seen with especially large volume buyers, the low profit margins within the industry prevent excessive customer bargaining. The level of bargaining power of suppliers is considered high within the industry. High switching costs for firms gives pricing power to suppliers and the strict regulations for the suppliers deters a considerable amount of entrants into the supplier’s industry. With the low quantity of suppliers and high required product quality, the suppliers are often very able to bargain with firms competing in the rubber and plastics industry. The threat of new entrants within the industry is low. The startup costs for a firm are large due to required trademarks, facility costs, machinery, and other costly items associated with an entrance to the industry. In addition, in the industry, firms face a considerable amount of legal barriers due to high regulations and permits required to operate. Within the rubber and plastics industry, the rivalry among firms is moderate. Even though there is a considerable amount of production in the overall rubber and plastics industry, there is low rivalry among firms in niche sectors. Firms that are highly specialized and provide high levels of product differentiation are considered to have lower rivalry within the industry and the rivalry that they do face is often with smaller, private firms. However, firms that have low product differentiation face a considerable amount of rivalry and often can only thrive if they conduct their business on a larger scale. In addition to these factors, firms face large costs upon exiting the industry due to large fixed costs. This will increase the level of rivalry in the firm. Using the Five Forces Model, we can conclude that firms in the industry uses cost leadership strategies to reduce costs to the firm and increase profits. Product quality, differentiation, and product price play a large role in a firm’s ability to maintain market share.

Accounting Analysis

In the accounting analysis, we observed the key accounting policies (KAP), the degree of potential accounting flexibility, evaluated the actual accounting strategy, and identified potential red flags of Myers Industries. The KAPs were analyzed to assess the degree of accounting flexibility within Myers. There are two types of KAPs. Type 1 KAPs analyses the competitive strategies Myers uses to stay competitive within the industry. This includes, customer service, product quality, and research and

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development. Analysis of these principles shows that Myers has a low level of quantitative disclosure, such as amounts invested in R&D, and high levels of qualitative disclosure, such as discussion on product quality in Myers’ 10K. Type 2 KAPs include potential areas for accounting manipulation by firms. These manipulations could potentially be being used to bad business practices and to mislead potential investors. We analyzed goodwill, foreign exchange risk, and operating leases and found that Myers’ quality of disclosure was below average for the industry. Through our accounting analysis, we found that Myers’ has a low level of disclosure in comparison to the industry. Even though we analyzed fourth quarter adjustments, restructuring costs, and goodwill as potential red flags, we found that goodwill was the only account that caused warrant for concern due to large accounts and failure to impair it. To account for this, we restated Myers’ financials.

Financial Analysis

In the financial analysis, we reviewed financial data over Myers and its benchmark companies. This includes forecasting the firm’s financials, analyzing ratios, and estimating cost of capital.

First, we analyzed the liquidity and operating efficiency, capital structure and profitability using ratios. Liquidity ratios help provide a method for comparing a firm’s capability and health to satisfy debt obligations with current assets. Preferably, there is a strive for higher degree of liquidity, but too much may suggest poor management. Operating and liquidity ratios are analyzed through the following ratios: quick asset, inventory turnover, days’ supply of inventory, current, accounts receivable turnover, cash to cash cycle, working capital turnover, and days sales outstanding.

Our team studied the sales growth ratio, operating profit margin, gross profit margin, asset turnover, return on assets (ROA), return on Equity (RPE) and net profit margin. Profitability analysis examines the ability to create earnings in excess of expenses though the firm. Looking at these ratios, MYE’s profitability is underperforming competition. Their major downfall was when Myers Industries, Inc. sold off a major branch of their firm which consists most of what they do to keep in business. It is highly unlikely MYE will remain and be able to continue to compete with larger firms.

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Capital structure ratios for Myers Industries allows us to compare Myers operating and investing activities. Ratios we used are: Altman’s Z-score, Times Interest Earned, and Debt to Equity. Because we use the capital structure ratios adequately, we are able to understand how Myers is obtaining funds. Compared to benchmark companies, Myers is at or below average on performance.

After determining financial ratios, it is now possible for us to forecast future growth and financials for MYE. We understand that our forecasts can be perfect, but we do believe they are reasonably accurate. Assumptions are made parallel to the available data to predict the foreseen performance of the firm. The longer the periods are forecasted, the less accuracy the numbers will be in our forecasts due to multiple factors. All of our forecasts acknowledged restatements for Myer’s goodwill. The last stop of our financial analysis was Myer’s cost of capital. Cost of capital is made up of cost of debt and cost of equity. Weighted average cost of capital (WACC), which is the average cost a firm takes on to obtain capital from equity and debt resources. The effective rate a firm pays on current debt is cost of debt (KD). Cost of debt and risk are positively correlated. To calculate cost of debt, non-current and interest-bearing liabilities are taken into account. Cost of equity, (KE), is the required rate of return shareholders require. To calculate Cost of equity, CAPM (capital asset pricing model) will be used. CAPM uses risk-free rate (rf) along with unsystematic risk or Beta (β).

Valuation Summary

Once cost of capital estimates, forecasts and 5-forces analysis have been completed, we are able to coordinate various valuation models over Myers. April 1, 2015 we had an observed price of $17.74 which our valuations will be relative to. With

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comparing values we calculated, we will be able to classify Myers as undervalued, fairly valued, or overvalued. We used two different models of valuations, method of comparables and intrinsic value methods. First, we forecasted share prices using industry ratios. This method does not carry much weight in our intrinsic valuation method because of the nature of the ratio. Using to value Myers Industries, the intrinsic value methods use the forecasted financials we calculated and provided value to the company based on internal information. Compared to the industry ratio analysis valuation model, the intrinsic value models are more reliable. Most of our weight for our valuations are on residual income model, long run residual income, and discounted dividend models. Less weight is placed on forecasted cash flows because of it being consistently unreliable. When calculating the models, we allowed for a 10% cushion for fair value, and we are able to come to the conclusion that Myers Industries is overvalued.

Overview of the Firm

Myers Industries Inc. is a diversified, international rubber and plastics manufacturer. Starting as a tire supply storefront in 1933, Myers Industries, Inc. has grown immensely and is now known as a leading polymer manufacturer in both international and domestic sectors. Myers industries went public in 1971 under the ticker symbol MYE and currently the stock trades on the New York Stock Exchange (NYSE). The firm has been around for nearly 85 years and its stock price performance has historically been bullish, depicting consistent growth from August 1987 at $2.20 per share growing to a high in December 2013 at $19.15 per share.

Today, the firm has branched out to a variety of new services and products. The firm now has 4 distinct segments of business. The material handling segment has successful brands including Akro-Mils, Jamco Products, Buckhorn, Novel do Nordeste S.A. Myers do Brasil; all of which have strong leadership positions across the automotive, appliance, general industrial/manufacturing, retail distribution, agriculture, and food processing markets. The Lawn and Garden segment has successful brands like Dillen, ITML, Listo, Pro Cal, Planters Pride, and Arko-Mils Lawn & Garden, which encompass a variety of plant containers specially marketed to growers and retailers serving the North American horticultural market. The distribution segment includes brands such as Myers Tire Supply and Myers Tire Supply International. Myers Tire Supply is known the largest US distributor and single source for tire, wheel, and under vehicle service tools. The Engineered Products segment has successful brands such as Ameri-Kart and Patch Rubber Company, which provide an array of engineered plastic original equipment, custom replacement parts, tire repair materials, and custom rubber and plastic components and materials. Myers has also made some recent changes to the structure of their firm by selling their Lawn & Garden and part of the Engineered Products Segments. Due to these changes, we will be focusing on the segments that

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are still anticipated to operate after the sale of these assets when analyzing financial reports.

Annual returns generally are an indicator of how successful a firm is, but when compared to the S&P 500, it is observed the Myers Industries, Inc. has experienced exceptional growth year to year. Over the past five years, the industry as a whole has realized volatile swings in revenue growth, while Myers has realized steady growth in revenue due to its exceptional products and services.

2009 2010 2011 2012 2013

Myers Industries Inc. Annual return % Cumulative return $

17.86% $117.86

10.64% $130.40

30.16% $169.72

25.42% $212.86

42.35% $303.02

S&P 500 Index– Total Return Annual return % Cumulative return $

26.46% $126.46

15.06% $145.51

2.11% $148.59

16.00% $172.37

32.39% $228.19

Table (1) Market performance comparison between MYE and S&P 500 from 2008-2013

Companies that operate in the same or similar industries include Newell Rubbermaid (NYSE: NWL), Hyster-Yale Materials Handling, Inc. (NYSE:HY), Cooper Tire and Rubber Company (NYSE: CTB), and Berry Plastics Group (NYSE: BERY) and for the sake of this analysis, we will assume that these firms represent the industry as a whole. Firms competing in the manufacturing, material handling, and distribution industries use innovation, development of manufacturing processes, and superior customer service and quality to rise in market leadership. After the recession, many firms, including Myers, saw their profits erode and experienced sharp declines in revenue growth. But the industry overall has rebounded to normal levels at a steady pace.

Table (2) Historical Sales Volume of Myers and its Competitors The market capitalization of a firm is the total market value of the firms’ outstanding common and preferred shares. The output is the public markets gauge of how much your company is worth. As stated in Yahoo Finance, the market cap for Myers Industries is $524.66 million. As of January 31, 2015, the stock price of Myers is $16.65.

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MYE stock market performance over the past 5 years

In comparison to the market capitalization, some analysts believe more

information can be derived from the total assets a firm poses in a given year. Assets are defined as an economic resource that can provide a future benefit. The following chart was made using Myers financial statements from 2008 to 2013.

Chart (1)

It can be observed from the graph that Myers had to scale down their company

following the recession, but after steady growth, Myers Industries expanded operations in 2012. In 2009, Myers sold Buckhorn Rubber Products and Michigan Rubber Products to reduce exposure to volatile original equipment vehicle markets. The 2012 spike in

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assets is attributed to the acquisition of Plasticos Novel S.A. and Jamco Products. The effect of these changes in structure can be seen in the growth of the firm.

Rivalry Among Existing Firms

We will now analyze rivalry among existing firms in the rubber and plastics industry to determine whether the industry has a supply and demand. Competitive behavior among existing firms is caused by competition for customers. This phenomena occurs in nearly every market- except monopolies -and is typically the root cause for rivalry. According to Michael E. Porter, rivalry can be promoted through price discounting, new product introductions, advertising campaigns, and service improvements. Porter states that the degree of rivalry intensity and the basis on which the rivalry exists directly affects profitability.

Industry Growth To fully understand the success of a particular firm, so we can find price setting

ability for market share, we must understand the growth of the industry for comparison purposes. When we analyze this, we will infer a higher degree of firm strength if the firm is making a low gain in a period of slow industry growth.

While analyzing the growth in the industry, we will consider all factors including economic expansion. Similar to the growth of a firm in comparison to the industry, the industry growth must be compared to economic growth. This evaluation could identify firms with competitive advantages if these firms withstood a form of industry adversity.

In the current period of economic expansion, the rubber and plastics industry has shown a growth in earnings. One speculated characteristic to this growth is the recent decrease in oil prices. Costs of goods sold within the plastics industry is likely to see a decrease especially in the last quarter due to the cost of resin being a subsidiary product of oil. Polypropylene and polyethylene account for a large portion of purchases within plastics manufacturing. Their prices correlate nearly 95% with the prices of crude oil, and therefore, a shift in oil prices could have major impacts on profit margins for the plastics industry. Inversely, if oil prices are to increase, the plastics and rubber industry may see slower growth, and sometimes no growth at all.

Table (3) Comparison of Myers and competitors profit margins

According to Table (4), the plastic resin market has seen a gradual growth in

sales throughout recent years and holds a strong presence in the United States

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economy, being the third largest manufacturing industry. This industry is typically closely correlated to rubber manufacturing and for the sake of analysis we will assume the chart closely represents Myers Industries, Inc. and the provided competitors. According to the American Chemistry Council from the years 1980-2010, the productivity in plastics manufacturing has seen a growth of 2.3% per year, compared to the 1.9% growth for the manufacturing industry as a whole. This helps us conclude that improving productivity in the plastics and rubber manufacturing industries are much more valuable to the bottom line than productivity growth in other industries.

Table (4) : Thermoplastic Resin Sales by Major Market According to the American Chemistry Council

Concentration Concentration within as industry is defined how many firms are operating within

it. This characteristic within an industry can directly affect a firm in the sense of whether it is price setter or taker due to monopolistic advantages.

The plastics and manufacturing industries are not heavily concentrated within the United States. Since there is such a varied and large demand for products within this industry, one could conclude that the industry is not heavily concentrated and therefore experiences less rivalry among firms than it would within a heavily concentrated market.

Differentiation Differentiation is a strategy used among firms to stand out amongst competitors

by creating a distinctive value for its customer Myers 10-K and their competitors’ 10-Ks, the reason why there is such a large differentiation is because they sell different products. Even though there are a multitude of companies within the plastic and rubber industry, nearly each company produces to provide for a specific niche or group of niches within the market. . Differentiation is most commonly seen as a vital characteristic in firms that are thought of as price setters or in industries where price wars could be devastating. Firms that value differentiation use unique products or

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services to focus on capturing a market share comprised of loyal customers. These customers purchase products for the brand image and their value of customer service.

Within the plastics and rubber industry, one of the many ways firms can try to differentiate themselves is by focusing on customer service. Especially in the distribution aspect of the industry, having a line of clear and easy communication between customer and distributor can be invaluable when it comes to maintaining maximized profits and productivity. In addition to creating a culture of good customer service within an industry, product value can also play an important role in differentiating a firm. Having quality products can attract a customer base that values long lasting products. Since these customers tend to put more research into their purchases, they will be more likely to pay a higher price and bring in larger revenues for each firm participating in the differentiation of quality products.

Innovation is another basis on which a company can differentiate themselves from their competition. Innovation can help a firm stand out by creating perceived benefits to customers through the introduction of new products. Since a large portion of material handling, distribution, and plastic manufacturing companies produce goods catering to a specific niche, the creation of innovative products play a large role in industry differentiation schemes. However, rivalry is subdued when looking at the differentiation techniques of each company since each business typically has a different line of products they are trying to differentiate.

Switching Costs

Switching Costs, in relation to the analysis of rivalry among firms, can be described as the cost a firm incurs to change the products it supplies. The degree of expenses is directly correlated to the amount of firm assets being used for alternative products. Within the manufacturing industries, switching costs are typically much greater than other industries. Switching products is usually a process that takes a future sales analysis to fully understand the results to profits, training for employees to understand the changes in machining or production, and a substantial amount of effort and time. Firms within the plastics and rubber manufacturing industry are not typically willing to consider incurring switching costs without a substantial addition to their overall bottom line. We could infer from this that firms are not readily willing to switch products to compete with existing firms.

Scale Economies Economies of learning can be described as a firm’s ability to improve efficiency with improved operations and training. Although stating improved operations and training may be easy, actually being able to analyze the proper and most efficient way to do so is often done through years of production experience. This means that companies that are just starting up are put at a disadvantage because of their lack of knowledge on the potential of their particular plant and warehouse efficiency. Similarly, new companies within the industry can experience disadvantages by not being able to reach an economies of scale because of smaller operations. Economies of scale can be

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defined as a firm's ability to lower fixed-cost per unit through a higher number of goods being produced.

Within the plastics and rubber manufacturing industry, efficiency is vital for a firm to reach maximum profits. If efficiency goals are not being met, it can increase the fixed-cost per unit because of lower production amounts. Usually, creating learning economies in a business makes the biggest difference in efficiency when a firm does not have strictly systematized production operations. Production experience can help develop systemized operations to guarantee maximum earned profits. This means that firms that have been in the industry for a longer period of time are able to create a lower fixed-cost per unit and firms that have not been competing in the industry for a long period of time pose less of a threat against competition.

Fixed-Variable Costs Costs within a firm can typically be broken up into two categories: fixed and variable costs. Fixed costs are incurred regardless of the quantity produced; while variable costs are directly proportionate to production. The ratio between these two costs can measured in operational leverage. A business that is known to have more fixed costs than variable costs would have a higher operational leverage than a firm that had more variable costs than fixed costs. Businesses that tend to have more operating leverage are at more risk because an error in forecasted sales could have a much larger impact on cash flows than a business that has less operating leverage. With less operating leverage, an error in forecasting will only have small effects on cash flows. For example, a real estate company will be more leveraged than a grocery store because of the difference each individual sale makes to revenues. Companies within the plastics industry typically can expect higher fixed costs and therefore, a higher operating leverage. This due to the high costs of machining and high costs of operating distribution warehouses.

Excess Capacity Excess capacity refers to the amount of assets and resources that are not being used to their fullest potential. On a business standpoint, having excess capacity alludes to the fact that either a company is not taking advantage of their assets, or there is not enough demand in the consumer market for a company to fully access their potential output without having excess inventory.

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In the plastics and rubber manufacturing industry, firms can have excess capacity in the form of excess storage in distribution warehouses, time in which machinery is not in production mode, and an excess in labor during periods of a demand lull. This can be seen in the table above where MYE is seen with a relatively low excess capacity while CTB and BERY have the largest excess capacity. This implies that MYE has the lowest unutilized capacity while CTB and BERY have the most. This can mean that firms trying to expand and may not be in a cost leadership position due to excess capacity within distribution warehouses.

Exit Barriers Exit barriers refer to the high costs associated with a firm leaving the industry. These costs can be incurred through specific or specialized assets, long-term liabilities, or regulations. Having assets that cannot be sold due to specificity or no income to pay long term liabilities could result in it being more costly for a firm to exit the industry than keep competing in it at a loss.

In the plastic and rubber manufacturing industry, the overall cost to exit could potentially be high based off of the specifications of their machines and the high likelihood of the firms having long-term liabilities. This leads one to assume that the costs are moderate-high. The effects of this would be that companies can be more inclined to stay in the industry, therefore increasing rivalry among competitors.

Conclusion In the plastics and rubber industry, we identified the rivalry among existing firms as mixed. According to Myers Industries, Inc. 10-K reports, competition in the plastics and rubber manufacturing industry is substantial and varied. With a moderate number of entrants in the manufacturing industry, Myers Industries commands a strong presence within niche sectors, but does not maintain a strong presence in the overall broad sectors of the market. Competition in the distribution segment is primarily from smaller, private firms, and therefore, there is less rivalry among existing firms in this particular segment.

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Threat of Substitutes

The threat of substitutes is the availability of other products that a consumer can purchase in a given industry with similar benefits. To give a clearer idea on this phenomena, this situation is commonly found in the technology industry- such that CDs were a substitute to floppy disks. Substitute products essentially perform the same task, but with a higher benefit to the customer. A higher threat of substitutes usually comes from more motivation within a market for innovation to fulfill a need.

Relative Price Performance Price determines which product is picked when they both perform the same

function at a similar degree. The products that are high in quality end up performing well, therefore, customers are willing to pay a premium. Given this, these firms experience a higher relative price performance measure.

Within the plastics and rubber manufacturing industry, prices are not typically driven high above production costs and therefore, the threat of substitutes is fairly low given the relative price performance.

Buyer's Willingness to Switch Besides the obvious consideration of cost savings (similar to relative price

performance) for consumers, customer loyalty also plays a large role in whether or not a customer is willing to switch to a substitute product.

With material handling, distribution, and plastic manufacturing industries there is moderate-low customer loyalty. In the case that a customer may be loyal to a specific brand or industry, they will likely have to give up their loyalty when the substitute product renders the current industry’s product obsolete.

Conclusion The threat of substitutes within the plastics and rubber industry is defined as low

due to the following factors. The relative price performance is low because prices are not driven by costs. There is also a low buyers willingness to switch due to customer loyalty to segments such as material handling and distribution.

Threat of New Entrants

Threat of new entrants refers to the possibility of new firms entering the industry and capitalizing some of the market share. The threat of new entrants consists in five areas: scale economies, first mover advantage, distribution access, relationships, and legal barriers. Scale economies are the idea that a fixed cost per-unit will decrease with the increase of quantity produced. Companies in the market are afraid of new firms entering the market, limiting their market share, causing higher fixed cost per-unit. The

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first mover advantage is the advantage that the first firm attains by entering the industry before anybody else. Being exposed to a new market before anyone else will give you a monopoly for a short period of time. Distribution access shows how the product is delivered to the customer. New companies to an industry could enter with new ways to deliver a product to a customer and affect sales of existing firms. Relationships, which are defined as the ties that firms have created and have strengthened with their suppliers over time. Many customers are loyal to a company or brand and when a new firm enters the market, it makes it harder for them to get the customer’s brand/company loyalty. Lastly, legal barriers that the firm faces, such as environmental regulations, patents, trademarks, and copyrights. Existing firms may have been grandfathered in, or already have the patents, copyrights or trademarks to allow them to complete their business in the industry which are very costly for new firms entering the market.

Economies of Scale Economies of scale is the cost advantage a firm asserts by expanding, thus

decreasing cost per unit of output. Economies of scale affect both fixed and variable costs that can apply to the size of the firm entering the industry. It is important to firms within the plastics and rubber manufacturing industries to keep these cost advantages over the competitors by producing more units in order to offer prices that are more attractive to customers to ultimately increase revenue. Maintaining low costs is an effective way to reduce the threat of new entrants to the industry. This is primarily due to new entrants not being price setters but rather price takers. If the price at which longer-term existing competitors are selling at is too low for new entrants, they will eventually be driven out of business due to lack of customers. Firms looking to enter an industry must be able to produce and sell at a level of firms already established in the industry to be competitive. Economies of scale could be a barrier to entry for new firms.

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Table (5) Total Industry Assets Broken Up Into Individual Competitors

In the plastics and rubber manufacturing industries, economies of scale plays a

large role in cost savings for existing rivals within the industry. The extent to which each firm within the industry benefits from economies of scale is closely correlated with the total assets each company possesses. Please reference Table (5) to see the difference in total assets between each company within the assumed industry. One can conclude from Table (5) that this particular industry runs with a high amount of total assets. A new entrant into this market would almost have to be a new sector of an existing, successful company to muster up enough capital to compete in an industry with economies of scale being strongly established.

First Mover Advantage Being a first mover enables a company to gain power and make deals with

suppliers and consumers before their competitors can. This allows for more efficient operations and cost saving from the suppliers. Being the first mover also enables a firm to gain more experience with respect to a market, resources, and competitive components of an industry. Gaining experience in a set market can be a difficult task for any new firms. Being more experienced in an industry can be a key advantage over competitors, however, the first mover can risks the chance of a new entrant coming in and capitalizing on the success while the first mover is still recovering research and development.

This acts as barrier for new entrants because they won’t be able to have the advantages and resources companies well established such as Berry Plastics Products who have a market cap of 3.91 B which is nearly 8 times bigger than Myers who has a market cap of 545.69 M already have.

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Throughout the industry of plastics and manufacturing, the sale of goods is largest in the business-to-business market and therefore, a first mover advantage is significant. Therefore, a new firm will find it challenging to succeed in an industry with such a large amount of successful firms.

Distribution Access A major priority of new entrants will be finding distribution access in an industry.

Distribution access is defined as a chain through which goods or services pass until they reach a consumer. One factor that new entrants have to consider when entering an industry is the cost and uncertainty of distribution access. New entrants could have limited options when it comes to distributors, as existing firms may already have limiting contracts with available distributors.

According to Myers 10-K , Myers has manufacturing and distribution centers in the United States (Salt Lake City, Utah, Southaven, Mississippi, Akron, Ohio & Pomona, California) and Brazil.

In the industry that we are analyzing, a large number of companies play an important role in their own distribution. Although they may source other companies, especially for international distribution, businesses within the rubber and plastics manufacturing can often increase cost savings by running internal distribution directly to business-to-consumer storefronts or distribute directly to other corporations using rubber and plastic products in their operations. Even if a new entrant does not have the capital to play a part in their own distribution, access to other distributors is still an available option and therefore, should not prevent new entrants.

Relationships

Relationships are a key to success in any industry to get low cost materials from suppliers. They also have to take into consideration the quality, strength, and purity to adhere to the highest standards set by firms and their customers. Companies within the plastics manufacturing industry work closely with their suppliers to develop innovative products and meet customers’ needs. These firms purchase nearly all of its raw materials from a wide range of third-party suppliers and have multiple sources for their products. Often a company will negotiate long and short-term contracts with these suppliers and distributors to maintain steady operations. These present relationships make future transactions easier and beneficial for both the operating manufacturer and their suppliers. Because of these present relationships between existing firms and their suppliers, new entrants will find it harder to scale their business enough to compete with existing firms is their respective industries.

Legal Barriers Legal barriers are regulations and legal statutes for certain actions that can

prevent new firm from entering an industry. The rubber & plastics industry is subject to

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moderate regulation. Some of the regulation in the industry is based on certain exporting and importing products internationally and safety standards for products. If a firm wants to operate in a different country, they have to abide by their rules and regulations. If a firm’s operations do not abide by these restrictions, they could face adverse tax consequences and costs that can affect their financial results in the future.

Many internationally operating manufacturers face legal barriers by being a defendant in various lawsuits and a party to various other legal proceedings. In the ordinary course of business, some are covered in whole or in a part by insurance. The outcome of these lawsuits could have a future material adverse effect on their cash flows. A firm could also be criminalized for probable liability in the in the event of a lawsuit that refers to past actions that have yet to come to light or to be proven.

Entrants in the rubber & plastics industry hoping to operate at the same level as firms present in the industry will face moderate legal barriers to begin operation. However, the costs of the legal barriers can be difficult to predict and therefore, make it difficult to determine the risk involved with entering this industry. In conclusion, the costs and risks may be too large for many entrants.

Conclusion Due to the plastic and rubber manufacturing industry’s size, the threat of new

entrants is low. Most competitors within the industry are private entities. Competition in distribution industries comes from private, smaller local and regional businesses. Due to the cost of start up in the plastics industry, the threat of new entrants is low. Patents, trademarks, machinery, and facility costs will limit the number of companies that will come into the industry.

Bargaining Power of Suppliers

A higher bargaining power of suppliers would refer to the ability of a supplier to control prices and sales options to their preference without losing customers. One can see this advantage when there are a small number of large suppliers in an industry consisting of primarily small firms. Suppliers can have an even greater bargaining power if there are no substitute suppliers for materials needed to operate firm production.

Since within the plastics and rubber manufacturing industries, there are smaller, less profitable, often third party suppliers, large consumers of products such as polyethylene, polypropylene, and polystyrene plastic resins play a major part in the bargaining power of suppliers being quite low. If something were to happen to one of the suppliers there are plenty of third party suppliers, switching to them could be done with ease and without sacrificing production time.

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Switching Costs When a firm decides to switch from one supplier to the next there are potential

costs that they could incur. For the analysis of bargaining power of suppliers, we will refer to these costs as switching costs. A firm within an industry could have contractual obligations with any third party suppliers to purchase a certain amount with any one supplier, commonly known as hedging. Hedging is a technique used for consumers to obtain a bargain price and for suppliers as a sort of insurance for consistent business. However, for the firm this could mean that they have no insurance against the risk of the price of commodities going up. This could have a great impact on the company as a whole due to variable costs seeing a large rise. Though, often, a company will set a contract with a supplier at a semi-fixed, or fixed cost to consumer. This can nearly eliminate hedging and will cause switching costs to be high in comparison to the cost of keeping business with a supplier.

Differentiation

The act of using business strategies and a market niche to set itself apart from competitors is called differentiation. In the rubber & plastics industry, differentiation of suppliers can have a major impact on the ability of a supplier to have a strong bargaining power over the consumer. If a supplier has taken the effort to differentiate, either their product, services, or distribution, it can be invaluable to firms within the industry. Since suppliers are in direct competition with other suppliers who specialize is similar products and services, they must have a great deal of differentiation to gain a significant bargaining power. The plastics and rubber manufacturing industries highly value efficiency and quality, therefore, a supplier that can differentiate themselves in both of these would have a strong bargaining position in the industry. Firms are constantly improving their products to set themselves apart from competitors and gain a market share in this industry and therefore, need a supplier that is willing to accommodate to these needs. This could include improving plastics strength, elastic modulus, distribution practices, overall value, and purity of product. These are all reasons differentiation and innovation will be keys to suppliers gaining bargaining power within this industry.

Importance of Product for Costs and Quality Driving forces in this industry are cost and quality. For a supplier having quality

raw materials that are in regulation is very important for a competing firm in the plastics and rubber manufacturing industries. With these standards, firms are expected to follow strict guidelines on how they produce their products and supply them domestically and internationally. If a supplier of raw materials were to shut down for not having met regulations a firm could easily switch over to another supplier. Because they have not set any contracts or agreements with anyone supplier, they purchase raw materials at the market price. The only downfall to this system is if prices were to increase then firms would be in a bind as their input costs would increase. One way to

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avoid this cost is to order raw materials in volume to reduce the overall cost of the inputs. An example of this could be to order more tonnage of raw plastic from suppliers in order to fill many customer orders.

Conclusion When examining these factors, the following assessment can be made for the

bargaining power for suppliers. Due to high switching costs for the firm’s, suppliers have considerable bargaining power. The ability of a supplier to differentiate themselves while providing quality products for a firm’s needs makes suppliers very desirable. These factors compiled with the fact that there is high regulation in the industry gives suppliers considerable bargaining power.

Bargaining Power of Customers

Bargaining power of customers refers to the ability of customers of a firm to negotiate terms of pricing and selling contracts with a firm. With less bargaining power of customers, an industry is more likely to have a going rate for products rather than varied rates for each firm within the industry. The bargaining power of customers can impact a company’s ability to create and maintain effective increases of profit throughout the company’s life. With more bargaining power of customers it’s much harder to set prices because of the influence customers have on sales. This force is typically affected by switching costs, differentiation, importance of product cost and quality, number of buyers, and volume per buyer.

Switching costs

Switching costs refer to the costs a client will incur when they switch to a different firm for their products and services. In this industry, switching costs can be low to moderate depending on the consumer of the product. Take for example, a car manufacturer that orders plastic molding from a company like Myers. The client may be able to switch to another firm but may have to change the design of the molding or even the car, which can have effects on their costs. No firm in this industry has the ability to make a client stay with their products because most of the patents belongs to the clients. Take for example, a client who wants custom air vents for their car. The client can take his patent/design to any of the competitors in the industry and get the product made for the lowest cost possible.

Differentiation

Differentiation is how a company sets itself apart from the rest of the industry using things like business strategy, instead of cost effectiveness. In the Rubber & Plastics industry, firms are always in competition with each other over clients through competitive pricing, variety, and value strategies. A firm can set itself apart by providing a unique array of products that customers will find more attractive and reasonably

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priced than their competitors. This level of competition is evidence of the amount of bargaining power clients have when it comes to the Rubber & Plastics industry. Firms are constantly using competitive pricing strategies and making a broad array of products in order to fulfill the needs of customers. Firms distinguishing themselves from competitors and its own brands it can target a select market or niche and make it a more attractive opportunity. This includes providing products with a wide array of sizes and toughness. An example of this would be a client looking for storage boxes for large amount of books. Now a regular box will not work as books are heavy and take up a lot of space, so the client will look for firms who have large boxes that are strengthened for load. This is the reason differentiation and innovation will be keys in success within this industry.

Importance of Product Cost and Quality

Quality and cost of a product are very important for a company that has such a vast amount of coverage in the industry. In the Rubber & Plastics industry, firms are competing for small market share in a very large market. This results in lower profit margins. To be competitive, a firm must employ pricing strategies, like 2 for $1 deals, to attract clients looking for quality products at a low cost. Many firms are also providing a wide array of styles and colors for their products to attract people looking for unique products. With clients looking for newer styles of products, firms are changing ways of production on an annual basis.

Number of Buyers

Profit margins of a company can be dramatically influenced by the customer base. With the Rubber & Plastics industry, the factors that come into play are: the price range, geographic location and quality. The reason for these factors are primarily due to the financial flexibility of most clients. The price range of a client can affect the amount and quality of the products they can afford. The geographic location can affect if a firm is selected to produce a client's order. The shipping and handling costs for a product may be too large for some clients to bare so they might only select firms in their state or city. An example of this would be a client looking for custom tires for their new auto shop. Since the client will be ordering tires on a weekly basis they will look for a firm close-by. Customers will also look for the highest quality and reasonably priced products, but if a firm has multiple locations around a country they can gain a larger market share of an industry despite price.

Volume per buyer

Volume per buyer describes the amount of product a select client will purchase at once. Bargaining power of customers will come into play here as the more a customer wants to purchase, the more bargaining power they have. In this industry, companies’ financials are comprised of multiple customers and not just one high volume buyer. Since there are such a large amount of firms, price competitiveness has eroded customer volume. Now there are some high volume firms like car manufactures that but

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they only buy a small amount of products at one time. An example of this would be a hotel that buys breakfast plates and cups from a firm. The hotel will probably get 1000 or so plates a day but chance are the firm has multiple hotels that also purchase 1000 plates a day. Overall, the volume per customer reduces bargaining power of customers in the Rubber and Plastics industry.

Conclusion

The rubber and plastics industry is one that has a low bargaining power of customers. The moderate switching costs, required differentiation, required quality and low price make it very difficult to compete in this industry. There are a significant amount of customers in this industry, but the highly competitive nature has given the firms all the power and very little to the customers.

Industry Classification on the Five Forces Analysis

Based on the five forces analysis, this industry is classified as a cost leadership industry with some differentiation. Reasoning for this classification is based on a number of factors. Within this industry, there is mixed rivalry among existing competitors due to significant market share in smaller niche segments but relatively small share in the overall broad market. We found a large market for substitute products, as all companies compete on price and a relatively low threat of new entrants, as there is a significant size advantage for well established firms, while new firms will have no access to distribution and suppliers. Bargaining power of customers is low due to factors such as switching costs and differentiation that benefit the firms. Bargaining power of suppliers is high primarily due to the high switching costs associated with firms switching suppliers. Given the industry classification, the business activities that create value in this industry are: economies of scale, efficient production and tight cost control systems, product quality, research & development (R&D), and superior customer service.

Key Success Factors for the Industry

The success of a firm in any industry is determined by the structure of the firm and their competitive strategies. The two ways to a structure firm’s competitive strategies are cost leadership and differentiation. A cost leadership approach focuses on keeping costs lower than competitors using cost controlling & cutting strategies. If a firm cannot compete using a cost leadership strategy, they must use differentiation. This strategy focuses on unique, innovative and new products. The drawback for the differentiation strategy is that it requires a significant investment is research and development along with brand development.

When analyzing the Rubber & Plastics industry, firms utilize a mixture of cost leadership and differentiation. Cost leadership is driven by economies of scale, efficient production and tight cost control system. An excellent example of this would the

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production of the containers and pallets in a closed-loop supply chain in the Material Handling segment of the company. This process helps keep material and production costs low so that the end product can be made efficiently and cost effectively. The tight cost reduction system allows the company to save money in production, which is reflected in the sales price. The result is a fairly priced quality product, which creates competition in the Rubber & Plastics industry.

A major factor for success and profitability in the Rubber & Plastics industry is differentiation. For the Rubber & Plastics industry, differentiation is driven by product quality, research & development (R&D), and superior customer service. These are the paramount values trusted customers look for while searching for products. Companies are always looking for new ways to improve product quality so they can build relationships with customers so they return for newer products. One way quality can be measured and evaluated by is the level of returns/warranties a company has to deal with in a fiscal year. An example of this would Cooper Tire having a reserve account exclusively for returns and warranties. This shows that they have had an issue with their products not being satisfactory to the customer standards.

Also, investment in R&D is key for this industry as customers are constantly searching for innovation in products that can improve productivity and efficiency. R&D can be measured and evaluated in a lot of ways but a common one is amount reinvested of sales revenue. The following chart shows that the larger companies in the industry invest almost 2% of their sales in R&D. R&D can also be gained through externally through other companies or even through the acquisition of companies with patents of specific products and processes.

Companies are also always looking to improve customer service. This is done in a

variety of ways: improving customer service interactions, specialized services and receiving feedback. When companies evaluate customer service, they are always looking to improve customer interactions as to provide a better experience for the customer. Specialized services are classified as treating new and returning customers with offers and discounts to be more competitive. This can be thought of as offering “special treatment” to customers that will make them feel better taken care of, and could be something they might be willing to pay a premium for. By receiving feedback, companies can measure and evaluate what customers are looking for, which results in improved customer service delivery. Customers are drawn in the Rubber & Plastics through cost leadership strategies while being competitive through cost leadership strategies.

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Firm Competitive Advantage

The Rubber and Plastic industry is a competitive market where firms work competing on market share, and customer relations. To remain strong in the market, firms are constantly competing in quality while keeping costs as low as possible. Along with helping their margins, firms also work on new technology to increase their market share to bring more customers to their market. Myers derives their competitive advantage through three core business strategies. Myers is leading the way to keep the company name well known in their industry based on previous customer opinions and requests. Also, they have a large section on product quality, keeping them near the top. Finally, Myers Industries are always working on expanding in industries that they are thriving while realizing when they do not have a big hand in that market anymore.

Customer Service

With Myers Industries, they focus on customer service, research and development and product quality. In order to keep great relationships with consumers of their products and keep them coming back to their company along with their locations across the nation and some internationally. Most of Myers’ new projects are from grabbing the attention of potential customers through their new website and customer referrals. Myers goes out of their way to make sure the customer is happy with their product with being on top of communication with past and future customers, along with using top of the line product quality.

Product Quality

Because Quality is so important to many customers, Myers makes it a major goal of theirs to keep their products top of the line. Customers go to Myers even though their prices are more expensive for their higher quality of product. Because of the higher quality of a product, Myers does a lot of custom work for customers. If someone wants something done with higher quality they go to Myers because of their expertise with their quality. Some do not mind a lower quality, but Myers Industries bases their products with top of the line products only.

Research and Development

With their Research and Development, we believe that Myers has an advantage over other firms because they are always improving their products, adapting to new technology, and keeping up if not surpassing the industry. Myers keeps investing in their own self which shows that they keep their technology, equipment, and materials top of the line. We believe that Myers will keep up if not surpass other companies in their industry with their quality through research and customer loyalty in growth.

Identifying Key Accounting Policies

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In order for to analyze the company in an accurate manner, we will consider the key accounting policies implemented by the company. GAAP are general accounting rules and guidelines all companies are required to follow. Due to certain principles, companies are able to disclose certain at their discretion. In addition, firms are able to decide how they want to state certain assets and liabilities, which gives companies the ability to control the level of disclosure they give to the public. Accounting strategies used by these firms are determined by which strategies make them look the best in the public’s view. In a given industry, certain standard accounting strategies may be followed by most firms. As a result, there can be a significant amount of difficulty differentiating certain items without significant analysis. We will focus on two specific types of key accounting disclosures. Type One principles are defined as accounting policies related to the key success factors for companies within the industry. Myers key success factors include: customer service, product quality, and research and development. Disclosure is defined as the amount of operational and financial activities a firm releases to the public. The level of disclosure a company has, provides a better understanding of the firm’s financial statements and results in a more accurate analysis and performance. Type Two accounting policies are defined as significant items on the income statement and balance sheet that managers may have a high degree of flexibility in while following GAAP procedures. Given the flexibility of managers with these items, distortions of the disclosure for these items may occur. This can materially affect an observer's view or judgement of the income statement and balance sheet. The most common Type Two key accounting principles for the Rubber & Plastics industry are goodwill and research and development. In order to analyze the true value of Myers, a complete analysis of Myers and its industry’s key accounting principle must be performed.

Type One Key Accounting Policies

Type One accounting policies are a disclosure of the competitive strategies firms use to develop a market share in an industry through cost leadership and differentiation. These are key success factors and strategies that lead to success in a given industry. The key success factors for Myers include: customer service, product quality, and research and development. In the following sections, Myers’ level of disclosure related to these factors and strategies will be analyzed. For this analysis, information from Myers and industry 10-K’s found on each firm’s respective websites will be used. The level of disclosure will be identified on an absolute and relative basis.

Customer service

One of the key success factors in the Rubber & Plastics industry is exceptional customer service to ensure a great experience for the customer and therefore, increased future sales. This key success factor focuses on retaining current customers and attracting new or potential customers. Expenditures on customer service at Myers is not only considered in one segment of the company, but spread throughout all levels of material handling and distribution. For instance, the material handling segment

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provides “superior customer service resulting in significant productivity and cost-saving benefits for our customers,” (Myers 10-K) while the distribution segment believes in an “improved overall customer service level” to build great relationships with the customers and insure repeat customers (Myers 10-K). The level of disclosure provided for expenses related to customer service in the Rubber & Plastics industry is very low.

All firms in the Rubber & Plastics industry, while stating customer service is a vital part of their business, have provided little to no details about the expense related to customer service. When analyzing Myers 10-K, it can be observed that there is a large amount of administrative expense, while all other firms in the industry have generally low administrative expenses with the exception of Newell Rubbermaid. It can be assumed that the customer service expense is placed in this account. On an absolute and relative basis, the level of disclosure provided in reference to customer service is very low.

Product Quality

The product quality for any firm is crucial for its success. Clients seek out great, quality products that will last a long time and are up to the highest standards when they choose a firm to purchase from. The Myers brand “fosters satisfied, loyal customers who have recognized our performance through numerous supplier quality awards,” (Myers 10-K). While there are many competitive products in the market, customers choose Myers “primarily on the basis of product quality, product performance, value, and supply chain competency,” (Myers 10-K). These statements are a testament to the product quality of Myers products and show the high standards that clients have. Clients choose Myers for their superior product quality, as this is what they find value in and not price. This is a key competitive advantage for Myers when it comes to competing with other firms in the industry.

Most firms in this industry assure product quality through copious amounts of R&D. The chart in the following section shows the amount of R&D associated with product quality. Most notable is Newell Rubbermaid with almost 110 million well above the rest. On a relative basis, the level of disclosure for the industry is high. However, the main method of product quality for Myers is the acquisition of companies that have a great industry presence. One example of this would be the acquisition of Plasticos Novel S.A. and Jamco Products, two major brands now under Myers that are industry leaders in their respective industries. The effect of the acquisition was an increase in sales of 34 million. This increase in sales was primarily credit to the high quality products of Novel and Jamco. But when it comes to the disclosure on these acquisitions, Myers does not provide a substantial amount of info to the public. On an absolute basis, the level of disclosure with regards to product quality is low.

Research & Development

In the highly competitive Rubber & Plastics industry, a key factor to success is research and development. R&D are activities that a firm chooses to conduct with the intent of making a discovery that can either lead to the development of a new product

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or procedures or to improve current procedures of products. The Rubber & Plastics industry as a whole reports a significant amount of R&D expense. Something that leads us to believe that Myers Industries pays a great deal of attention to research and development in their operations is their ownership of the Akro Mills brand. This brand is recognized throughout the material handling industry because of “new product development and listening to the ‘voice of the customer’ to provide solutions,” (Myers 10-K). Although Myers repeats throughout their 10-K how important R&D is for the firm, Myers has not released any financial analysis over its research and development expenditures, while other firms within the industry have. The comparison is in the following chart.

In general, the firms in this industry invest substantial amount of money in R&D as represented in the chart above. Newell Rubbermaid is by far the highest, with an excess of $110 million invested in R&D per year. It is also no coincidence that Newell Rubbermaid is also the most profitable of the stated industry. While Berry Plastics Group has less invested in R&D, they are still quite profitable. Overall, the firms in this industry are heavily reliant on R&D and have moderate disclosure. On an absolute and relative basis, Myers has a low level of disclosure for R&D.

Type Two Key Accounting Policies

Type two accounting principles are items that may be strategically chosen on a company’s financial statements to conceal the true value of a company. For the Rubber & Plastics industry, these items include goodwill, foreign exchange risk, pensions, and operating leases. The following sections will contain an analysis of the issues involved with these items and if they materially affect our interpretation of the firm’s success or failure. Additionally, we will inspect if they can be misrepresented in the financial statements issued for the public and potential investors.

Foreign Exchange Risk

Foreign exchange risk is exposure to changes in currency rates. Myers is exposed to this risk due to some of their subsidiaries operations in foreign countries including Canada and Brazil. While these operations are in foreign countries, most of Myers’ transactions in these countries are denominated in U.S. dollars. The firm also has a “systematic program to limit its exposure to fluctuations in exchange rates related to certain assets and liabilities of its operations in Canada and Brazil that are denominated

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in U.S. dollars,” (Myers 10-K). The net FX exposure is generally from 2-10 million. While Myers does face FX risk, they choose not to use derivatives or hedge because they believe the risk will not materially affect the business. A representation of the percentage of FX loss is shown in the chart below.

As seen in the chart, historically, Myers has significant losses when compared to net income. Even though the expected risk was low, Myers’ decision not to hedge or use derivatives has resulted in significant losses in the past 5 years. Our view of Myers’ leverage has changed due to the large losses and lack of loss control. However, these numbers could change due to the recent structural change in the company.

Goodwill

Goodwill is an intangible and subjective asset that represents a premium paid for the acquisition of another firm. It can also represent the competitive advantage gained in the acquisition. The issue with goodwill is that firms keep it as an asset for a long time and don't properly impair it overtime. While the competitive advantage gained with the acquisition, most companies keep goodwill as an asset for much longer than it would reasonably last in an industry. This can materially affect the view of the firm.

As stated in Myers 10-K, “Goodwill is subjected to annual impairment testing, unless significant changes in circumstances indicate a potential impairment may have occurred sooner.” Myers tests goodwill using a qualitative assessment and the two-step test. This allows Myers to impair goodwill when the carrying value is higher than the assets’ fair value. For 2011-2013, Myers goodwill arose primarily due to the acquisition of Novel and Jamco whose value for goodwill was 9.832 and 7.435 million respectively. On observation, Myers purchased these brands due to their success and industry leading products. Both of these operations were added to the Material Handling segment of Myers. Goodwill for Myers will have to be a significant amount to require a restatement, which will be determined in the evaluation of actual accounting strategy.

Operating Leases Operating leases are contracts that allow for an entity to use an asset without taking ownership rights. These are often referred to as “off balance sheet liabilities” because they are not capitalized for the person using the asset under the lease. Since these items have tax incentives are not stated on the balance sheets, they may enhance financial ratios of the lease.

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For the Rubber & Plastics industry, the use of operating leases is very common. The following table display the operating lease obligations for the Rubber & Plastics industry in 2013:

As the table shows, there are significant level of operating leases for the industry. The level of disclosure for leases in the industry and Myers is high. The variation in the amount of leases may be due to the size of the company; such as when we compare Myers to a larger company like Berry Plastics. Since firms are understating their liabilities and interest expense, their credit worthiness can be overstated. As a result, if these leases are extensive, they need to be capitalized along with interest expense to find their present value. Operating leases will need to exceed a certain threshold to require a restatement, which the evaluation of actual accounting strategies will determine.

Conclusion

Type one and type two accounting policies are an essential part of comprehending an accounting analysis to properly value a firm within an industry. Type one policies are related to the level of disclosure of accounting strategies with respect to the key success factors for a firm relative to an industry. Based on the level of disclosures provided for the KSFs, the type one policies level of disclosure for Myers financials in low. Type two policies are items that can materially affect an analyst's or public's view of the firm’s financials. The big type three policies for Myers included operating leases, goodwill and foreign exchange risk. All three can materially affect an analyst's view of the firm’s financials. These policies had a relatively high level of disclosure.

Assessing Degree of Potential Accounting Flexibility

The degree to which a firm has control over accounting flexibility is directly related to the industry it performs in. Although there are general guidelines for accounting procedures (GAAP), these principles are simply a framework for accounting practices. Sensitivity to these guidelines are typically brought about and unofficially set within an industry and are expected to be followed by each firm competing within it.

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Failure to do so could result in the loss of investor trust. Firms that operate with a higher degree of accounting flexibility have a greater ability to distort estimates to meet target performance goals. The accounts that are typically known to be most flexible and hold the most room for distortion are leases, goodwill, and research and development.

Capitalization of Operating Leases “According to FASB, a lease is an agreement conveying the right to use property,

plant, and equipment (PP&E) usually for a stated period of time.” The four primary criterion for identifying whether an asset is a capital lease rather than an operating lease include:

1. At the end of the lease term, the asset ownership will transfer to the lessee 2. The lease agreement includes the option to purchase the leased property at a

bargain price 3. The lease term is greater than or equal to 75% of the leased asset’s economic

life 4. The leased property’s present value is greater than or equal to 90% of the fair

value (excluding portion of payments toward executory costs) *If any one of these criterion are in the nature of the lease, it will be considered a capital lease.

Although all firms within the plastics and rubber industry have clearly identified the amount of operating leases they have, the ability to manipulate this number still should be accounted for. Due to a company’s ability to manipulate assets by taking them off of the balance sheet and reducing their leverage -otherwise known as off-balance sheet financing- through lease arrangements, we will be analyzing the nature of the operating lease account next section. Myers industries at the end of 2013 held $45.3 million dollars in operating leases.

Goodwill

Goodwill is defined as an asset that results from the acquisition of a new company that is valued above the value defined from the acquisition's liabilities and assets. This manipulation can come from a lack of impairment. Due to the recent acquisitions of Novel, Jamco, and Sceptor, Myers has a substantial amount of goodwill and it is hard to properly value it due to the complete restructure of Myers Industries’ operations. However, in reference to the chart below, you can still see that the goodwill Myers’ has acquired is substantial.

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Although goodwill has had small impairments from January 2013 to January

2014, the impairments are minimal, resulting in only a .068% decrease during this timeframe. In addition, this data does not include the most recent acquisition of Sceptor in July 2014. In the chart below you can see the impairments of goodwill in years 2011 and 2012 and compare them to the previous goodwill chart. The annual goodwill chart shows that in these years, Myers Industries did not record an impairment because their fair value exceeded their carrying value.

Overall, the goodwill account seems to have a great deal of flexibility due to Myers’ decision to not use impairments on the account two subsequent years and with the ability to hide the negligence to impairments with recent acquisitions.

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Conclusion Although there are an excessive amount of ways in which a firm can manipulate

and distort financials for cosmetic reasons, we only analyzed Myers’ flexibility of accounting standards concerning goodwill and operating leases due to their high relevance. With this analysis, we can conclude that the overall flexibility of Myers Industries Inc. is fairly high due to

Evaluation of Actual Accounting Strategy

When it comes to determining the actual accounting strategy of a firm, two variables are important to take into consideration. First, how much information the firm discloses (level of disclosure), and second, whether or not the firm’s accounting policy is conservative or aggressive. Firms are able to choose whether or not to disclose certain items on their books while still fulfilling GAAP requirements. Whether the accounting policy is conservative or aggressive can under or overstate the financials. Conservative accounting will lead to understated assets, understated net income, overstated liabilities, understated equity, and create low risk management. Aggressive accounting has the potential to lead to the exact opposite: an understatement of liabilities and an overstatement of assets, net income, and equity. Given the information disclosed by the firm, we will determine whether type two accounts may or may not be distorted due to aggressive or conservative accounting. The type two accounts we will be focusing on for Myers Industries are Operating Leases and Goodwill.

Accounting for Operating Leases

Operating leases are accounts in which give firms the ability to keep assets off the books and increase expenses. This therefore increases the D/E ratio, or leverage. There may be distortions in a firm’s financials if their operating leases are a large percentage of total liabilities. The standard for capitalizing operating leases properly states that if the operating leases account is bigger than 20% of long term assets, then it must be capitalized. Because operating leases are not capitalized for the leasee, the practice of recording operating leases can also be referred to as “off-balance sheet liabilities”. The rubber and plastics industry doesn’t report a significant amount of operating leases, but compared to competitors, Myer Industries reports the smallest amount in the account ($45.3 million). The past 5 year average for Myers’ operating leases as a percentage of long-term liabilities is 18.47%. Since this number falls below the 20% threshold of operating leases to long term liabilities, we will not be capitalizing the account.

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In thousands

Conclusion Due to the comparison of Myers’ operating leases to their total long-term

liabilities the operating lease account is not identified as aggressive. Although the account did surpass the threshold for capitalization during 2009 and 2013, when looking at other year’s data, we are assuming that these points are outliers. Although we will not be identifying this Myers’ account as aggressive, we cannot consider the account to be conservative either, primarily due to 2009 and 2013. The operating lease account is identified as moderate in terms of the aggressive or conservative accounting applied to it. This means that there are no major distortion effects to balance sheet accounts, so we will not further capitalize the account. Accounting for Goodwill

Goodwill is the extra value a firm, or company, gives to the real asset obtained in an acquisition because of its reputation, hidden benefits, and history. Goodwill arises as the premium value the company is willing to pay for an acquisition’s brand name, clients, good customer and employee relationships, and patents.

In 2010, Myers’ recorded a goodwill impairment charge of $72.0 million in its Lawn and Garden Segment. In 2009, the Company had impairment charges of $5.5 million related to certain property, plant and equipment related to the restructuring plans in its manufacturing segments.

Myers Industries recently acquired two companies during 2012-13 Novel and Jamco for $9,832 and $7,435 (quantity in thousands). Myers Industries latest acquisition is Sceptor for which goodwill numbers are not available at the moment.

In thousands

As shown in the table goodwill takes up more than 60% of other assets for the

last 5 years. Myers Industries uses absolute aggressive accounting policy to improve their financial position, because despite that big impairment charge they made to goodwill on 2010, they still have over $60 million in goodwill. This accounting strategy overstates their net income, equity and assets, and understates liabilities.

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Ultimately, we conducted a benchmark comparison between Myers, Cooper Tire, Berry Plastics Group, and Newell Rubbermaid where goodwill is compared against the companies’ PPE to determined Myers’ goodwill on a relative basis. Myers’ goodwill account is identified as conservative on a relative basis because does not have more goodwill than PPE unlike Berry Plastics Products and Newell.

Quality of Disclosure

The quality of disclosure is an important part in analyzing a firm’s financial standing. The financials presented can have a negative or positive effect on the valuation of the firm. Managers and the companies they are managing have many tools at their disposal to present what information they want if they wish. Our analysis team will review the quality of Myers Industries financial statements in order to create an accurate evaluation of the firm.

In the case of Myers, we believe that the firm discloses a substantial amount across the industry to make an accurate evaluation of Myers’ on qualitative and quantitative measures. Some firms decide to disclose the minimum amount required by (GAAP) the guidelines for financial accounting standards. This may lead to firms sometimes leaving out vital information relevant to the financial statements. It is important that we determine the quality of disclosure as high, low, or mixed, because this will determine the quality of the valuation.

Myers discloses a large amount of information unrelated to creating an evaluation. Myers describes risks of the market, high interest rates, and foreign exchange risks along with seasonal changes that could set some sales numbers lower

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than forecasted. However, on Myers 10-K they don’t disclose any information about research and development although we know they do invest in R&D. The benchmark companies mention research and development on their 10-Ks and three of our benchmarks disclose numbers associated with the costs. Throughout the competitor’s 10-Ks three of the four competitors do not list properties and dates associated with their leases, Myers Industries and Hyster-Yale do. Across the industry there is sufficient material disclosed from the firms in order to create an efficient evaluation.

We can effectively evaluate the firm with all the information that Myers has released and disclosed with proper knowledge. Management discloses enough information on the financial statements in order to make a relevant and informative valuation.

Economies of scale

Myers achieves economies of scale with distribution centers located from Brazil to Canada and all over the United States. Having over ten brands in their portfolio helps achieve this economies of scale on a worldwide base. Becoming a larger firm means increasing economies of scale, disclosing such information as how much property is owned directly relates to their economy of scale. For example: Myers has a list of properties from their Distribution sector to their Manufacturing sector listed in their 10-K. From the floor space to the approximate land or acres that each building is occupying Myers discloses the vast space it needs to facilitate such economies of scale. A description of the use of the land and buildings gives investors information on what Myers intends on doing with the land and buildings. The notes section also has expiration dates of leases held for certain properties giving an inside look at the amount of manufacturing and distribution they believe they will need for coming years.

Goodwill

Myers Industries disclosed a lot of details on their 10-K about the goodwill they have acquired throughout the years. In 2012, they had 61,056 of goodwill and in 2013 60,642 of goodwill. With tax deductible goodwill of 7,437 in 2013 and 5,206 in 2012, “impairment testing used discount rates based on the weighted average cost of capital determined for each company’s reporting units and those ranged from 9.3 to 12.3 in 2013.” Myers does a good job of disclosing goodwill and costs associated with goodwill compared to their competitors. Hyster-Yale had no goodwill information on their 10-K report.

Operating Leases Myers has $45.3 million in operating leases; as compared to the competitors we choose who are well above Myers numbers, the closest competitor shows $56.0 million in leases which was Hyster-Yale. The size of the leases directly relates to the size of the firm. For example net sales for Myers was 825,210 thousand as compared to Newell Rubbermaid’s 5,692.5 million in sales, and operating leases were 432.6 million. These leases directly coincide with the assets, liabilities, and equity a firm has. With the

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valuation of these leases we need to figure out if it meets certain thresholds to require restatements. The information needed to do so was disclosed and Myers does a good job of showing the numbers needed to create such figures from their 10-K.

Conclusion

Our analysis team came to the conclusion that Myers Industries has a high quality of disclosure directly related to their financials. From the 10-K we can obtain quality information for a detailed and concise analysis evaluation.

Identifying Potential Red Flags

Red flags are scenarios that cause a lack of confidence in the reported financials due to a lack of disclosure. This can include distortions in firm financials, fourth quarter adjustments, an excess amount in type 2 accounts, potential lawsuits, and asset write-offs.

Fourth Quarter Adjustments Analyzing fourth quarter adjustments are important because they may prove that

a company is adjusting books to manipulate investors. In 2010, Myers Industries’ valuation of each segment surpassed the need for a Step 2 test to be performed. Although the original test for valuation was passed, in the fourth quarter of 2010, the lawn and garden segment reported a goodwill impairment charge of $72 million, leaving the fair value at $9.3 million, an 88% decrease from the original value. Even though this large impairment may have made us wary of the reporting within this year, Myers described 2010 as being a bad year for the lawn and garden industry which created a sharp decline in sales and therefore resulted in the decrease in value.

Goodwill

Goodwill, a potentially distorted account, is a significant amount in the books of Myers Industries. Since the goodwill account in Myers is over 20% of PP&E, 40.57% for 2013, we have identified goodwill as a red flag for Myers and will be restating it for an accurate analysis of net income. Even though there has been a recent structural change in the company, which required numerous acquisitions, if an increase in gross profit does not compare to the amount in the goodwill, then we will assume that goodwill is overstated and is not properly being impaired.

Restructuring Expenses

Restructuring costs can be incurred from items such as non-cancelable leases and severance costs when selling a sector of a company. However, when a company is trying to restructure, they have historically used this opportunity to take a big bath to hide other costs. Although this practice is not common, we will be analyzing the restructuring costs of Myers to determine if restatement is necessary.

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Total Restructuring Costs for Individual Segments of Myers in Thousands

In addition to disclosing the restructuring costs for each segment, Myers Industries further disclosed the makeup of each segment’s restructuring costs. Below you can see the disclosure given in Myers Industries Inc. 10-K.

“In 2012, restructuring costs of $0.7 million for severance and non-cancelable lease costs were

offset by a gain of $0.8 million on the sale of four facilities in the Distribution Segment. In addition, $1.2 million of restructuring charges were recorded in the Engineered Products Segment

related to non-cancelable lease costs and termination charges. The Lawn and Garden Segment had $0.5 million restructuring charges for severance costs incurred. The Corporate costs included

$0.3 million of restructuring charges related to severance costs.

In 2011, restructuring costs of $2.1 million for severance and non-cancelable lease costs were

offset by a gain of $0.7 million on the sale of facilities in the Distribution Segment. In addition, $0.3 million of restructuring charges were recorded in the Engineered Products Segment related

to non-cancelable lease costs and $0.4 million of costs related to mold remediation for a closed facility were recorded in the fourth quarter. In the Lawn and Garden Segment, a $0.3 million

write-down for an idle manufacturing facility was recorded in the first quarter and severance

costs of $0.4 million were recorded in the fourth quarter related to restructuring.

In 2010, the $2.7 million of restructuring costs were primarily related to rigging, freight and other

costs to move machinery and equipment. In addition, the Company recorded some idle facility charges and consulting costs which were expensed and paid in the period.”

The high disclosure, coupled with the insignificance of restructuring expenses

incurred by Myers compared to net income, results in restructuring expenses not identified as a red flag in Myers’ financials.

Conclusion

After analyzing all potential red flags within Myers’ financials, we have come to the conclusion that the only account that has significant warrant for concern in the goodwill account. This is due to the large amount within the account in comparison to PP&E and a lack of impairment.

Undo Accounting Distortions

After we identified the red flags listed in the previous section, we discovered a lot of the data needed to be restated. Following the restatement, the financial statements

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of Myers Industries will be more transparent and be less distorted. Within Myers Industries, the red flags were operating leases, and goodwill.

Operating Leases

Within Myers, there were some operating leases, but not enough that we had to restate them, but Myers did have some operating leases.

Goodwill

Goodwill shows the premium value a firm pays to acquire another firm. Goodwill is the difference between the price they paid for the company and the fair market value of the firm. With having goodwill on the books, it is listed as an asset that the firm cannot do anything with. Many firms fail to impair their goodwill which makes their books seem stacked to make their company seem to be making more money. Myers Industries has large quantities of goodwill while looking through their financial statements. Going through, Myers has goodwill has a significant effect to the balance sheet and income statement. To restate goodwill the first step is to get the balance sheets and income statement for the previous 5 years. After that, you have to find out how much has been stated previously and how much they should have per year.

To provide information that is somewhat reasonable within the rubber and plastic

industry, we assumed that the competitive advantage would only last for five years. We took the new goodwill over five years and impaired to maintain or assumptions. Because of the changes in impairment, assets decline as expenses increase to create the impairment which in the process decreases retained earnings.

Financial Statements

A major factor for investors is a company’s financial statements. The financial statements show the overall performance of a company. To determine the true value of Myers Industries, we revalued the company’s balance sheet and income statement from 2009 to 2013. Adjustments made between the statements given on the 10-K and the restatements are for impairing goodwill in the assumptions in the above table. Myers does not disclose their Research and Development (R&D) which is something that can be misstated, which makes it hard to try and restate.

Balance Sheet The balance sheet is the financial record in permanent accounts like assets, liabilities and stockholder’s equity. With these records, you can find out the financial position of the company at that moment in time. Below, we have the balance sheets as stated and restated for Myers Industries between 2009 and 2013.

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The balance sheets as stated and restated above show the changes in liabilities, assets, and stockholder’s equity because of the competitive advantage of goodwill needing to be restated. When restating Myer’s goodwill, I had to start out with adding goodwill back to the company because in 2010 Myers wrote off $71,035 when they should have written off $22,385.4 so I had to add back $48,650 to their good will to even out the numbers for later restating.

Income Statement

Annually, companies keep up temporary accounts in their accounting process using their income statement. Income statements allow them to close out revenues and expenses to recalculate retained earnings. To understand the firm’s value from year to year, you need to know the changes to the financial statements like their goodwill impact the income statement and how that changes the balance sheet for the next year. The tables below show the income statements stated and restated balances for the years 2009-2013.

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From the tables, the impairment of goodwill causes net income to increase in 2010, but decreases from 2011-2013. The reason is because of the over impairment of goodwill in 2010 to lower their goodwill after a low year to just get rid of it and even out the statements and causing us to adjust the impairment to be not as high as they wanted and space it out over five years of its useful life.

Conclusion

The differences between the stated and restated statements are in choices made by Myers in the gray areas of accounting. Myers decided to no impair their goodwill unless there was an economic struggle going on and they wanted to just blame lower income on the economic downfall during that period. Because they did not impair goodwill, their income in years that were not impaired were overstated making the company look more profitable for investors than they really are.

Financial Analysis

In order to assess Myer’s value the team will conduct a prospective analysis, using ratios in order to get a reliable view of the financials. In this section, we will conduct a trend analysis and cross-sectional analyses. This section provides an overall view of Myers Industries, Myers’ competitors’ performance, and firm-specific trends. This section will compare Myers’ Industries to the benchmarks in the industry and analyze the ratios to provide a valuation of the firm. After the ratio analyses, forecasting of financials will be analyzed which can be a foundation for valuing the firm. Lastly, cost of equity, cost of debt, and weighted average cost of invested capital will be examined. All benchmarks contain the same fiscal year end except Berry Plastics, which has its

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year end in September. This could potentially cause misleading estimations and ratios, but since the results we got for Berry Plastics were consistent with other competitors’ ratios, we decided to keep them in the analysis.

Liquidity and Operating Efficiency Ratios

Liquidity reflects how quickly a firm can convert their assets to cash. We will be analyzing liquidity because it is particularly useful when determining the ability of a firm to repay its debt obligations using assets.

Operating ratios reflect the ability for a firm to turn products or services into cash. These ratios will determine whether or not firms are able to maintain the liabilities they incur. In this section we will analyze the following ratios: current, quick asset, inventory turnover, accounts receivable days, and working capital turnover.

Current Ratio

The current ratio is analyzed to determine a firm’s ability to use short-term assets to meet the expectations of short term liabilities under normal circumstances. To calculate the current ratio, we take total current assets divided by total current liabilities. Once these results are formed, we will conclude that a firm having a ratio of less than one means that the firm is considered risky and financials are unfavorable by investors. In addition, they are considered to be unable to pay for all of the current liabilities within a year. Current ratios tell us how much in assets a firm has for every dollar in debt of current liabilities. If the firm has a ratio that is abnormally larger than one, it could mean that there is poor management of inventory and receivables, therefore, preventing growth.

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Cooper Tire and Rubber has a ratio that fluctuates from 1.48-2.58 we believe it began to rise starting in 2011 due to the fact that CTB was being acquired by Apollo tires. Myers stays within the average for the industry, only exceeding it in 2008 after the recession and in 2010. Overall, the industry is above the ratio mark of one. However, some of the firms are well above one which could potentially mean they have mismanagement of receivables or inventories.

Quick Asset Ratio

This ratio is similar to the current ratio in that it compares total current liabilities, but varies because it uses only assets that are able to convert quickly to cash in a just-in-case situation or distressed situation. We include cash, short term investments, and short term account receivables in the accumulation of short-term assets. Even though inventories is considered to be a short-term asset, it is excluded in the calculation of quick assets. This is because it is not known how long it will take to sell the inventory and convert to it to cash. Like the current ratio, the ratio for a firm must be above one in order to fulfill its liability obligations. However, if the firm has a quick asset ratio below one, it does not always mean that it is negatively impacting the firm. We must take into account that inventories are not included in this ratio and inventory affects firms differently and are typically a large portion of current assets.

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Similarly to the current ratio, the numbers are steady and you can see that CTB has a spike from 2011-2013 due to the acquisition stated in the current ratio section. BERRY’s ratio is extremely consistent throughout 2008-2013, and Myers stays consistently competitive with the firms. All companies are ranging between ratios of 0.8 to 1.0 except Cooper Tire who leads the industry; this is considered positive for investors due to lower risk.

Inventory Turnover

This ratio provides a look into the performance of Myer’s management to replace inventory under normal circumstances. When analyzing this ratio a high number is better for Myer’s, a high number indicates there is a good rate of sales for the company. Since inventory is subject to depreciation, price changes, and other factors it could have negative effects on a firm’s books and harm the firm’s ability to recover losses. We calculate the inventory turnover ratio by dividing cost of goods sold by inventory.

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Myers is consistently under the industry average for the time period we calculated. This means on average, Myers has a higher cost of goods sold compared to inventory that its benchmark competitors and is therefore running at less risk than its competitors. We also have to take into consideration the stability of turnover within each firm. CTB had their ratio jump from 6.57 to 8.58, the highest of between the competitors between 2008 and 2013, and Myers stayed consistent through the 5.30 to 6.00. The range for Myers seemed to be consistent with the overall trend for the benchmark firms.

Accounts Receivable Turnover

The accounts receivable turnover ratio measures the efficiency of collecting credit revenue for the firm. We calculate this ratio by taking net credit sales or total sales and divided it by the average accounts receivable for a period. With a higher turnover, we find that the firm is more efficient with their receivable collections.

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Myers’ has a relatively consistent ratio as compared to the benchmark firms and the industry average. Cooper Tires has the highest ratio within the industry which results in a high efficiency for the firm’s accounts receivable. Berry’s ability to collect on these accounts is more efficiently than the rest of the industry as you can see with the graph above.

Working Capital Turnover

This turnover ratio represents the company’s ability to create sales with working capital. To get this ratio we take Myer’s sales divided by working capital. This ratio should be compared to the previous year’s ratios to see progress and trends over time; with Myers we see that the firm stays consistent through the last three years with the expectation of 2009 which is a high spike for the ratio, we believe this was due to the recession but it could be much more factors involved. Generally a high number is better, compared to the benchmark companies Myer’s working capital is creating some value for the company but overall the firms are very segmented as the graph shows below.

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Cash-to-Cash Cycle This is a measure of how fast cash spent within the firm, such as cash to pay its suppliers, is converted back to cash through the payment on accounts receivable by customers. We get this ratio by adding the average days it takes to receive payments on accounts receivable to inventory turnover minus the average amount of days it takes for the firm to pay its accounts payable. This number shows how quick cash is being converted from non-cash accounts. The reason we subtract accounts payable is because it shows how long cash is being held before anything is paid out.

In the industry, Newell Rubbermaid is the second behind the leader Myer’s. We can see that there was a decline in the cycle in 2013, this is due to the selloff of their lawn and garden section and accounts being sold off to the buyer. All companies are in

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the range of 40-100 showing relation between the competitors in the industry. Myer’s is the industry loser with a cash-to-cash cycle above 109 for the six years analyzed.

Liquidity Analysis Conclusion

Overall, Myers is relatively not competitive with the industry. The ratio that stands out against the competition in a negative way is the Cash-to-Cash Cycle compared to the competition. They are substantially behind of the competition, this is having a negative effect on the firm in the long-run, but since we can see that they have maintained this number while in operations for six years, we conclude that management is running operations improperly to keep the company liquid.

Profitability Ratios

Profitability ratios measure the company’s ability to generate earnings for the stock holders and a company as a whole. We examined seven profitability ratios including: annual sales growth, gross profit margin, operating profit margin, net profit margin, asset turnover, and return on assets and equity. With these ratios we will determine if the performance from Myers’ is comparable to the competition or outdoing the competition.

Annual Sales Growth

The sales growth percentage increase shows how much growth the firm has had from period to period. We can easily see the competitions growth for say if they had a sell off or if they acquired any companies and increased their market share. In order to get this percentage we take the current year’s revenue and divide by the prior year’s revenue and subtract one.

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The percentages that are significantly different are in 2008 when the recession hit. There was negative growth, but Myer’s came back with a 19 percent increase and was fairly competitive in the industry in 2010. Newell Rubbermaid made a huge jump from 2010 to 2011 increasing their growth from 3 percent to 184 percent from the previous period. We contribute this large increase to multiple acquisitions that Newell Rubbermaid made, we can also see that Myer’s increased 20% in 2013 from 2012 although they sold off a section of their firm.

Gross Profit Margin

Gross profit margin is a ratio that serves the purpose for showing the percentage revenue that is left after we subtract the cost of goods sold. We calculate this ratio taking the revenue minus the cost of goods sold all divided by total revenue. This number can vary for different industries and is most helpful in comparing how profitable the firm is relative to itself in the prior periods. These numbers are much more consistent across the board as compared to annual sales growth percentage.

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Myer’s gross margin is stable from 2008-2013. Although it’s not the highest profit margin, it is competitive with the industry leader of Newell Rubbermaid. The industry average from 2010 has a slow declining ratio. There is segmentation between the firms except for the bottom three which have consistently similar ratios.

Operating Profit Margin

Operating profit margin is the amount of earnings generated by every dollar of sales; we get this ratio by taking total operating income divided by total revenue. In this ratio we include expenses, sales, and general administrative expense. When the margin is at a higher percentage this means the firm has a higher operating efficiency and can be using a much better pricing strategy than the competition.

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Myer’s restated ratios are consistent with the original ratios except for the

2010 numbers. Although we don’t have the restated 2009 ratios, we can conclude that in 2008 there was substantial effect of the recession. Conversely, there is a contradiction with 2010 stated and restated ratio coming from negative to positive although the numbers were correct when checked the restated income statement.

Net profit Margin

The net profit margin is a contrast of operating profit margin, to get this ratio we take the firms net income divided by sales. We can conclude that this ratio represents the percentage of a company’s bottom line or the net income that is total revenue. Similar to the previous ratios, this ratio best serves as a comparison to prior years or the competition. For the industry 2009 was a year of losses for some firms except Hyster Yale. Bery’s plastic group has been underwater for four of the six years we calculated the ratios for, Myer’s restated net profit margin shows another story compared to the original numbers. We can see that there has been slow net profit if any compared to the rest of the industry, although we haven’t restated the competitor’s numbers as we did Myer’s.

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Asset Turnover

This ratio represents the amount of revenue accumulated for each dollar of sales. In every industry a high asset turnover ratio indicates that the firm is using their assets effectively. In general terms it’s best for the firm when the ratio is increasing because this means the firm is generating more sales per each dollar it has. This means the assets are becoming much more efficient. We get this ratio by taking sales and dividing it by total assets.

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We can see that Myer’s has the second highest average in the industry and is increasing from 2012 when it fell .63 tenths of a percent from 2009. All of Myer’s competition relatively stays consistent with their asset turnover ratio within a range of .10 except for Cooper Tires meaning management is taking some measures to increase the ratio which has jumps from 2009 to 2010 and then fell in 2012 to 2013. Although Cooper Tire was acquired in 2013 by an India firm FINDLAY they have not shut any of their manufacturing sites in the United States down. The restatement shows the same or similar picture as the stated ratios.

Return on Assets

Return on Assets is a representation of net income generated per dollar of assets. In general it is best for this ratio to be a high number. When a firm increases their revenue it is important to note that the changes to this ratio should be accordingly. We get this ratio by taking net income divided by the previous year’s ending asset balance. Hyster Yale is the most consistent throughout the industry with growth continuing in all of the six years, while Berry’s plastics under water for four of the six years we analyzed. Myer’s was in negative but has come out and is slowing down growth, but we can conclude that in 2013 it went down because of the selloff of their lawn and garden section.

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Return on Equity

ROE or Return on equity is the profit of shareholders equity. We calculate this number by taking net income divided by owner’s equity. We can utilize this ratio when comparing competitor’s firm’s ability to create profitability. If the firm’s net income is increasing and the stockholders equity is constant, this means the firm is using the equity for investing and is utilizing the equity in a manner that is best for the shareholders. The volatility in the industry is apparent when looking at the graph, while Hyster Yale is the most consistent staying at a level of 30 and deviating more than 2 percent of lower they are extremely managing their equity at a high level. Myer’s was negative for 3 years and has come out from under the water yet they have not been as consistent in maintaining a reasonable ratio as compared to the industry average. In the next section we will discuss the Debt to Equity for the firm’s and if it has significant into why Myer’s was relatively low compared to the industry. No data on Berry’s was able to be analyzed.

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Profitability Ratio Analysis Conclusion

Myer’s profitability ratios indicate that they are competing well within the industry average. Keeping the ratios above or in range of the average of the industry, Myer’s is successful in certain areas. Keeping these ratios above or with the industry Myer’s will see growth in the future and could possibly become an industry leader.

Capital structure Ratios

The capital structure of the firm is a picture of the operations that are being financed. With these ratios being analyzed the group can understand how Myer’s is acquiring funds. There are hundreds of methods for a firm to acquire funds and each has its own costs, first we will examine Myer’s Debt to Equity ratio to get a look into how Myer’s is leveraged. Credit risk is a big factor in evaluation for investors and analysts, having a creditworthy company can greatly increase the chances to get funds. We evaluate Myer’s ability to leverage their debt in order to get funds to invest in certain areas of the company.

Debt to Equity

With the Debt to Equity ratio we can analyze how Myer’s is leveraged or how much debt it has. With this we can confirm the accounting rule that assets must equal liabilities plus shareholders equity. In an investors’ view we would want to know how much debt a firm we are about to invest in has. Analysts vary in which number they like for this ratio; a higher number means the firm is aggressively financing its assets with debt. If Myer’s growth rate is less than the cost of debt, then the creditors are benefiting from this rather than an investor.

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Myer’s debt to equity ratio is consistent for all six year’s we analyzed the firm’s, clearly jumping out is the volatility of the industry average. Cooper Tires was financing a substantial amount but has since decreased starting from 2008. Negative numbers is not possible in the real world so we ignore negative ratios.

Times Interest Earned

This ratio measures a company’s ability to pay its interest expenses from operating income. A high ratio means the company has the ability to pay its interest in a timely manner. This ratio indicates how many times the firm can pay its interest expense out of earnings before interest and taxes come into play. When we analyze this ratio we want it to be above one, we get this ratio by dividing EBIT by total interest payable. We see that Myer’s has one of the highest ratios compared to the industry. We only have data for four year’s so we can’t exactly say with certainty that we know Myer’s is doing well but we can conclude that with this data we see a trend and it’s very comparable to the industry as a whole.

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Altman’s Z-score

This ratio takes 5 ratios and computes a credit score in order to assess the chance of a bankruptcy for the firm. The formula for this ratio is below. Z = 1.2(Net working capital/total assets) +1.4(retained earnings/total assets) +3.3(EBIT/total assets) +.6(MVE/BVL) + (sales/total assets)

For this ratio the typical rule is we want it to be above 3.0 at which this number the company does not expect to go bankrupt anytime soon, if its below 1.8 we have a high risk of the firm going bankrupt.

As the graph shows all the firms in the industry are above the 1.84 mark except Berry’s plastics although they have raised the number since 2008. The industry is safe from bankruptcy except for Berry’s plastics.

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Internal Growth Rate Internal growth rate is the highest rate a company can grow by using its earnings and no outside investments, or debt equity. We calculate this with the formula below:

IGR = ROA * (1- Dividend Payout Ratio) in this calculation we multiply the retention of net income that isn’t paid in dividends. What this means is that fewer dividends a company pays it can reinvest in the company and this equals to a higher IGR.

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There is high volatility in IGR in the industry; the most consistent company is Hyster Yale with steady growth starting from 2008 and growing until 2013. The lowest IGR for the firms wasn’t 2008 or 2009 when the financial crisis hit, there was erratic numbers throughout the industry for all six years we analyzed, and the firms had low numbers throughout the six years. Myer’s was third in average across the board. Cooper tires had a substantial decrease in IGR from 2012 to 2013 we speculate this is from the India company acquiring Cooper tires and taking different management distinctions from the sale. With this ratio we can see from an ROA results that Hyster Yale is increasing net income and continuously growing while increasing assets while Myer’s is slowly declining in both ratios.

Sustainable Growth Rate This ratio tells us how much or limit at which a firm can grow without changing capital structure, along with that this ratio determines the amount a firm can grow without changing leverage. In general terms the rate at which a firm can grow without borrowing money. This is the measure of how efficient the company is operating. Myer’s was growing from 2008 until 2010 when it fell to negative 16.60 percent. Myer’s is the industry leader with an average of 6.86 and bounced back from being negative. Hyster Yale has had steady increases starting from 2010 up to 2013. The operations of

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Myer’s shown by this ratio shows us that the firm is growing yet some changes could be made in order to maintain the a healthy consistent growth rate.

Conclusion

Compared to all the other benchmark companies, Myer’s is competitive against the competition in the industry. Myer’s is a leader in certain areas and stays above the average in many of the ratios we analyzed.

Financial Forecasting

Financial forecasting is the use of trends, ratios, and assumptions to calculate possible future financial statement balances. The ultimate goal is to provide an estimated value of the firm’s equity. The intrinsic valuation models will be based upon discounted future financial performance measures specified by the particular valuation model employed. Hence, forecast financial information is a critical input into the valuation process. The short-term forecasts are the most essential pieces of information as any small mistake can ruin the rest of the forecast. Long-term forecasts just follow the trend of the first few year’s forecasts. By utilizing the information from Myers

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financial statements, we forecasted out their statements out 10 years past the most recent year, 2014.

Income Statement

To start forecasting out financial statements, we started with the income statement. Using assumptions based off the trends for the past 5 years, we forecasted out sales, cost of goods sold, gross profit, net income, and other expenses and sales figures we assumed would be important in the process of forecasting. We determined the sales growth for the past five years and found an upward steady trend. In 2012 when there was a 28% decrease in sales due to restructuring of the firm and its segments. The restructuring was done in the lawn & garden and engineered products segments of Myers, which accounted for 40% of sales for the firm. After the restructuring, the sales continued the steady growth of .2% per year till 2021 to 8% where it flattens out. This growth was based off the acquisition of Scepter and that Myers has stated they would acquire more successful brands, like Scepter, in the coming years.

After projecting the sales growth over the next 10 years, we created a common sized statement by dividing each line item by the total revenue. A common sized statement allows us to find patterns and trends for sections like cost of goods sold, gross profit, and operating expenses. We determined the cost of goods sold would decrease at .5% each year till 2021 and flatten out from there. This trend is due to the effective cost management strategies incorporated by management. We also noticed a slowly rising trend in operating expenses in years not affected by restructuring of the firm. Using this information we predicted the operating expenses to slowly rise to 23% due to the purchase of Scepter and possible future acquisitions. The most interesting trend was found in the net income, which consistently stays around 3-5% of sales. This is due to the losses Myers was incurring from the engineered products and lawn & garden segments. Given the restructuring of the firm, we assumed the net income would rise by .5% per year to 6% in 2021 and flatten out from there. The Income had to be restated though because of the “red flags” mentioned in the accounting analysis section. The main difference between the stated and restated income statement is the inclusion of the goodwill impairment section which caused the operating expenses to rise to 26% and eroded away the net income to 1%. Using the projections from the income statement, we can start forecasting the balance sheet, statement of cash flows and the dividends.

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Dividends Forecasting

The valuation of a firm is heavily dependent on future expectations of dividends growth. Myers Industries dividend payout ratio is roughly .30 cents per share annually and paid out quarterly. Since Myers has been reducing its shares outstanding for the last 5 years through a share repurchase plan, we assumed that this trend would continue for the next 5 years. As a result, Myers will increase dividends for the next 5 years, by .02 cents per share per year, to .40 per share and then keep steady at .40 per share for the foreseeable future.

Balance Sheet

After forecasting out the income statement, we used the forecasted dividend and financial ratios to forecast the balance sheet. The process started with finding a trend for the asset turnover ratio and forecasting it out for 10 years. We forecasted that the asset turnover ratio would follow the current trend and stay at 1.2 for the next 10 years. This assumption was based off of Myers management’s ability to keep sales and the use of assets growing at a steady pace. Using the asset turnover ratio, we forecasted out the total assets, which is basis for forecasting out the balance sheet. We used liquidity ratios to forecast the current assets and liabilities. Now that we had the total assets figure, we common sized the balance sheet to help identify patterns and trends. We forecasted that current assets to have a steady decline at 1% per year till 45% in 2020 due to reduction of high inventory related segments of the firm. Non-current assets were forecasted at a growing trend at 1% per year to 55% and flatten due to the assets held for sale created by the restructuring of the firm. A similar trend was found in the liabilities section of the balance sheet due to the same restructuring of the firm. Again, we sustained this trend in our forecasts. Current liabilities grew steadily at 32-35% while long-term liabilities dropped from 68% to 65% and stayed constant thereafter. The trends found in Myers are consistent with the Rubber & Plastics industry trends and patterns, as well as, patterns of a firm that buys and sells segments/brands often. Next we forecasted the equity section of the balance sheet for Myers. When forecasting the stockholders equity, we made the assumptions that no new shares would be issued by the firm but would be bought through the share repurchase program. As a result of the repurchase program, shares outstanding would steadily decrease and dividends would slowly rise. This would cause retained earnings will grow at a slow rate and get the retained account out of a deficit. The retained earnings were forecasted by adding net income and subtracting by dividends paid for each year till 2024. The rest was just balancing the liabilities and equity with the total assets. After forecasting out the balance sheet, we can move on to the statement of cash flows, where we forecasted dividends.

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Statement of Cash Flows

To forecasting the statement of cash flows, we will forecast the operating, investing and financing activities of Myers. Estimating trends in this section required dividing cash flow from operations (CFFO) by sales, operating income and net income for each year. The most noticeable trend found was that CFFO was always around 8 percent of sales. So we took that trend and forecasted it out 10 years. To estimate cash flows from investing activities (CFFI) we took sales and divided it by the noncurrent assets for each year in order to get the Fixed Asset Turnover ratio. Once the ratio was calculated no real trend was noticeable due to the firms restructuring consistently changed the noncurrent assets while CFFI was consistently in the negative. We used an average of the years restructuring was not occurring and calculated the ratio to be .378. We forecasted out the average for the next 10 years. The dividend forecasting section is the only applicable part of the cash flow from financing activities section.

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Cost of Capital Estimation

To discount Myers’ value of assets, our analysis team will assess the firm’s stated cost of capital. Cost of capital is known as the cost a firm incurs to finance their business. These costs can include the costs of debt, equity, or a combination of the two. The WACC is widely used for understanding the point in which a business can start generating profitable returns and adding value to the firm. For the sake of estimating the present value of firm’s financials, we will do a proper analysis of Myers’ cost of equity and debt. This will determine if there are distortions in the value, creating either under or overstatements in the financials.

Cost of Debt

Cost of debt can be defined as the effective rate of interest paid on a firm’s borrowings. This section of a firm’s capital structure can include the rates of various loans, bonds, or other forms of interest bearing liabilities. This cost is important to investors because of the larger risks associated with high costs of debt.

In thousands

According to Myers’ 10-K, long term liabilities are $236.429 million, but we changed it to 243.596 million, because we add it’s pension benefit obligations for 7.167 million at a 3.90% interest rate. Myers’ loan agreement is $137.109 million at a 4.00% interest rate. Unsecured notes add up to $100 million at an average rate of 5.07% interest rate taking into account both their weight and rate. We calculated the weights of each interest bearing liability and with that we calculated the cost of debt, the sum of each liabilities interest rate times its weight, equaling cost of debt of 4.45%.

Cost of Equity

Cost of equity (Ke) is also knowns as the return on equity that shareholders require. For a company such as Myers, the return on equity is the return that the shareholders require when buying ownership stake in the company. Cost of equity is calculated by the Capital Asset Pricing Model (CAPM) which is:

Ke = rf + β* (rm – rf)+Bsize

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The CAPM formula takes into account the risk-free rate (rf), systematic risk (beta), and the market risk premium (rm – rf). All of the risk-free rates are taken from Treasury bond yields found on the St. Louis Fed website (FRED).

To obtain cost of equity in this analysis, the most recent 10-yr treasury rate at the end of February 2015 (2.00%) was applied. The market risk premium is the exceeding return investors, or in this case shareholders, require over the risk-free rate. According to the text Business Analysis Valuation, “Over the 1926-2010 period, returns to the Standard and Poor’s 500 index have exceeded the rate on the intermediate-term treasury bonds by 6.7 percent. As a result, many analysts assume that the market risk premium is around 7 percent.” However, we chose a market risk premium rate of 8% because 6.7% is conservative, and with recent bull years we can safely assume that the market risk premium rate should be higher.

Lastly, the beta known as a measure of systematic risk or market risk came from multiple regressions using the Myers’ historical returns and the market risk premium associated with treasury yields. Below you will see the results from regression analyses using the 10-year, 7-year, 2-year, 1-year, and 3-month treasury constant maturity rates. The multitude of these regressions were done to ensure an accurate and informative Betas. Betas describe how stock returns react to swings in the market. For example, a Beta of 1 will assume that the stock’s returns move precisely with the market; if Beta is less than 1, than its returns will be less volatile than the market; and if it is more than 1, its returns will be more volatile than the market.

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Even though Myers’ adjusted R2 is more significant for the majority of regressions at 72 months which is 32.03%, meaning that nearly a third of Myers is systematic risk while the other ⅔ variation comes from firm specific character; thus, these findings are

consistent with Myers 2014 10-K. We decided to use the Beta given by the 10-year treasury constant maturity rate over a 24 month period for our estimations of cost of capital. Using a the Beta given by the 10-year treasury at 72 months would have given us a higher explanatory power, however, with the recent restructuring of Myers’ sectors, we had to consider the sharp recent increase in risk and make sure that the Beta reflected it. When comparing Myers’ estimated Beta to that given by Yahoo (1.45) and Google (1.62), our Beta is significantly larger. We are confident in disputing a higher Beta because of the major recent changes in Myers’ and the spike in risk within the last 24-36 months.

The chart below reflects the size premium we used when preparing our cost of equity chart above. We used Yahoo’s estimate of Myers’ market capacity on April, 8,

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2014 (539.68M) to decide which decile Myers falls in. Being a smaller firm, we used a size premium of 2.7% for Myers.

Backdoor Cost of Equity

Backdoor cost of equity is another method used to calculate the cost of equity. The backdoor cost of equity method avoids using historical data through CAPM to obtain accurate returns. Instead, it manipulates the following formula shown below in which it applies the price to book ratio, ROE and growth to provide an estimation:

In this evaluation we have restated both the income statement and balance sheet and therefore, calculated both a re-stated and as-stated value for backdoor cost of equity. Due to a considerable change in restated goodwill, there is a fairly significant difference in the as-stated and restated costs of equity. In addition, these costs of equity vary quite differently from the costs calculated in cost of equity. While the as-stated and restated backdoor costs of equity are valued 11.27% and 7.73% respectively, the 95% confidence interval from above stated a cost of equity between 12.79% and 37.35%. However, we will consider the backdoor cost of equity as a more

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valid estimation primarily due to it being based on carefully estimated values than rather simple statistics.

The return on equity was found by carrying out the return on equity based on forecasts and then estimating what return it seemed to be converging on. Growth was estimated by finding the growth of forecasted sales and then estimating the value that seemed to be consistent with growth patterns. The price to book ratio is 3.67 according to Yahoo finance as of April, 8, 2014.

Weighted Average Cost of Invested Capital A firm’s Weighted Average Cost of Invested Capital (WACIC) represents the

amount a firm pays for each dollar it finances in either debt or equity. Through this method, the calculation for cost of capital is done by applying weights defined by the percentage of market value of liabilities and equity from the total market value of the firm. We then multiplied the weights by the cost of debt and equity, respectfully. This process can be seen in the following formulas:

In order to calculate the weights to apply to equity and liabilities, we first found

the market value of both liabilities and equity. To find the market value of equity, we went on yahoo finance on April 10th, 2014 and found a market capacity valued at $533.80M. Myers’ 2014 balance sheet listed long-term liabilities as $236,429 (in thousands), but once we took into account the value of Myers’ pension benefit obligation, Myers had a total of $243,596 (in thousands). We are assuming, for the sake of this analysis, that the market value of the firm is equal to the sum of our calculations for market value of liabilities and market value of equity. The market value of the firm is estimated to be $539,431 (in thousands). Given this, the weight of total liabilities is $243,596 (in thousands) and the weight for total equity is 295,835 (in thousands). This leads us to assume that the majority of Myers’ equity is held in equity.

In finding the WACIC, we multiplied the cost of debt by the weight of total liabilities and the cost of equity by the weight of total equity. The cost of debt was taken from the cost of debt section above equaling 4.45%; and the cost of equity was used from the 10-year, 2-factor cost of equity, 25.02%. Using a tax rate of 36.4% given

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by Myers’ 2014 10-K, the before-tax WACC for Myers Industries is 15.73%, and the firm’s after-tax WACC is 15.00%.

By using a 95% upper and lower confidence level of Ke, we estimated the upper and lower bounds for the weighted average cost of invested capital (WACIC). We’re certain that the true WACIC falls within this range. The tables above show a range of 8.29% to 21.76% for the after-tax average cost of invested capital.

Conclusion

According to Myers’ 10-K, “the discount rates used based on the weighted average cost of capital determined for each Company’s reporting units and ranged from 10% to 13% in 2014.” Given this statement, WACIC would suggest that Ke is in the lower range of our statistical range and our calculated WACIC has minimal error due to falling within the 10% to 13% range.

Method of Comparables

We used the method of comparable section to determine the value of Myers by using different ratios to compare Myers against its benchmark competitors. Most ratios use the stock price heavily to compare value of Myers to its benchmarks. For each ratio, we took the mean of each ratio excluding Myers’, and then adjusted our evaluated company to that value. Our benchmark companies for each ratio are Cooper Tire, Berry Plastics Group, Newell Rubbermaid and Hyster-Yale.

For Myers the observed current closing price we used dated April 2nd 2015, which turned out to be $17.74. To set upper and lower limits per share, we implemented a 10% spread because MYE has the lowest share price in the benchmarks and lower

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value stocks tend to be more volatile. The lower limit price is $15.97 per share and the upper limit price is $19.51 per share; thus, anything below the lower limit means that Myers is undervalued and, anything above would mean that is overvalued.

Trailing P/E Ratio

Trailing P/E ratio is not applicable because it uses a company’s earnings and Myers has negative earnings for 2014, which creates negative earnings per share. This makes the measurement trailing P/E ratio useless for Myers this analysis.

Price to Earnings (Forward)

Forward price to earnings ratio is very similar to the trailing ratio, the only difference being that forward P/E uses forecasted earnings per share. How accurate this ratio is depends on how precise the forecasted financials are. Myers forward P/E ratio was calculated by using the net income/earnings we forecasted for 2015 from the forecasted income statement, which turned out to be 19.982 million which then was divided by total number of shares outstanding 31,162,926 to obtain earnings per share (EPS) of .64.

To reduce error margin we extracted EPS of Myers’ most similar competitor Newell Rubbermaid from YCharts.com. The average forward P/E for the industry was 29.61. Then we multiplied Myers forward EPS by Newells’ comparable ratio the restated price became $18.99 which falls within the 10% meaning that Myers is fairly valued.

Price to Book Ratio

The price to book ratio also called “price-equity ratio” can be calculated in two different ways, but the end result should be the same regardless. One is to divide the current closing price of a stock in this case Myers divided by its book value per share (book value divided by the number of outstanding shares). The other way to get it is to divide market cap (share price of the company times the number of shares outstanding) by the company’s total book value. We used the first one.

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Myers current closing stock price of 4/2/15 according to yahoo financials is $17.74 and their most recent book value per share stated on their 2014 10-K for the year 2014 is $4.70 giving us a price to book ratio of 3.77.

Price to Book Multiple

The price to book (P/B) ratio has no forecast errors the book value is extracted solely from the financials provided by each firm. A lower than the average P/B ratio implies that the firm is undervalued while anything above the industry average means that the firm is overvalued.

The average firm industry in taking into account three of Myers competitor is

3.85. The restated Myers price after multiplying the industry average times the book value per share increased to $18.07 from the previously observed price of $17.74. $18.07 falls within the 10% range price we established for Myers, which means that Myers is fairly valued. Berry Plastics Groups wasn’t taking into consideration because it has negative book value per share.

Dividend to Price Multiple

The dividend to price multiple analyzes the relationship between a firm's dividends and price on a per share basis. The flaw in this valuation is that all peers must consistently pay dividends to yield a viable valuation. Out of Myers competitors, Berry Plastics does not pay dividends and Hyster-Yale is the outlier in the dataset. Therefore the comparison was only between Myers, Newell Rubbermaid and Cooper Tire & Rubber. 3 companies do not represent an industry so this valuation will not carry a significant weight. For this reason, the dividends to price ratio will not affect our overall view of Myers.

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Ones we removed Berry Plastics and Hyster-Yale, the average ratio of Myers industry peers is .01. The adjusted price per share of Myers using the dividend to price ratio was $14.92. The model price is slightly below the lower bound of $15.97. Taking into account this valuation is only between three firms, this computation does not reflect Myers performance relative to the industry. The result of this comparison should not be relied upon when making an investment decision.

P.E.G. Multiple

The P.E.G multiple is calculated by dividing the P/E ratio by the 5-year forecasted growth rate of earnings per share. The formula is as follows: ((P/E)/EPS Growth)-P.E.G. This method is similar to the P/E ratio with the exception that earnings growth is considered in the calculations. High growth rates will result in low P.E.G. and low growth rates will result in high P.E.G. Although this multiple is important, it is not applicable to Myers as there is a negative earnings per share, which would result in a negative P.E.G. ratio.

Enterprise Value/EBITDA

The enterprise value to EBITDA, which is earnings before interest, tax, depreciation and amortization, is calculated by dividing the firm's enterprise value by EBITDA. Enterprise value represents the value of the actual operations of the firm. It is the sum of the market value of liabilities and equity minus the sum of cash assets and investments of the firm. The firm’s capital structure does not affect the calculation.

The average EV/EBITDA multiple for Myers industry is 42.99. This is using only Hyster-Yale and Cooper Tire & Rubber because they are more comparable than the outliers, Berry Plastics and Newell Rubbermaid. The model price of $13.58 falls slightly below the lower bound fair value of $15.97. This means the stock is currently overpriced. Myers restated EV/EBITDA is not significantly different. Which can be attributed to the adjustments for goodwill not having a significant effect on the EBITDA. Since EBITDA represents operating cash flows for Myers, this comparison can be relied upon for an investment decision even though there are two outliers.

Intrinsic Valuation Models

Intrinsic valuation models are used to value a firm’s equity using forecasted performance and an applicable discount rate. Even though these models are subject to

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forecast error, there are finance theories grounded in their calculations that allow for a potentially more accurate valuation. In addition, intrinsic valuation models take into account time value of money unlike the multiple pricing models. We must note than when evaluating the terminal value of a firm it will approach zero through the time continuum when discounted at an accurate cost of capital. This is due to the assumption that firms will lose their competitive advantage over time. While analyzing intrinsic valuation models, our team will use residual income, abnormal earnings growth, discounted dividends, discounted cash flows, and long-run residual income models to assign a value to Myers Industries’ equity. Of these models the abnormal growth and residual income models will be the most useful and applicable in our valuation, but utilizing all five models will provide a precise valuation of Myers’ equity. To make sure that estimation error and are best/worst case scenarios are accounted for in our estimations, our team will prepare a sensitivity analysis for each model. We will determine a boundary approach with 20% swing (10% in either direction). We are choosing this analysis type because it accounts for estimations made in the models without overestimating boundaries and causing error in deciding whether the firm is under or overvalued. If the share price calculated from the following models exceeds 10% over $17.74 ($19.51), the closing stock price as of April 1st, 2015, we will assume that the stock is not fairly priced and undervalued. For derived stock values that fall 10% below the share price as of April, 1st 2015 ($15.52), we will assume that they are overvalued. Any derived price of MYE stock that falls between $15.52 and $19.51 will be considered fairly valued. All final recommendations given by our team will be determined in consideration of whether our valuation models set prices within, above, or below the determined fairly valued range.

Discounted Dividends Model The discounted dividends model uses the two-factor cost of capital for the firm

to discount or find the present value of future forecasted dividend payments. Although this method is grounded in finance theory, it assumes that the value of the firm is solely based on dividend payments and not appreciation in future stock prices. This means that the model has a higher explanatory power when a majority of earnings within a firm are channeled into dividend payments rather than reinvested in the firm. Given this, we can assume that the discounted dividends model has a low explanatory power.

This model uses the present value of the projected dividend stream for the next 10 years. To find model price per share, we divide this number by total shares outstanding. We then found proper and reasonable dividend growth of $.01 per year based on historical dividends. To find the perpetuity growth rate, we forecasted out 50 years’ worth of dividends and then found an average growth rate.

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This model shows that within reasonable measurements of costs of equity and perpetuity growth rates, Myers current stock price is highly overvalued. Even in the best case scenario a perpetuity growth rate of 4.1% and a cost of equity of 5.27%, the price still falls $6.50 below our lower bound.

Utilizing the central value of the discounted dividend model (2.008), we can calculate that only 11.2% of the stock price is supported by the estimated dividend stream. Considering this and only considering results from this model, we can see that there is no upside potential with the restructuring of the firm because dividends do not significantly support the stock price. Additionally, when using the estimated dividend stream from 2015, it would take 131.41 years for investors to recover their initial investment if not accounting for the time value of money. Even though the model represents that the stock is severely overvalued, this would appear in most company valuations because most firms generate value from growth rather than dividends.

Discounted Free Cash Flow Model Where the Discounted Dividends Model derives stock value from future dividends, the Discounted Free Cash Flow Model derives the stock value in a similar manner- from future cash flows. While this method of valuation typically has a higher explanatory power than its counterpart, it has its own sources of error due to inconsistencies within capital expenditures. The discounted free cash flow model uses the fundamental equation stated below:

Market Value of Assets = Market Value of Liabilities + Market Value of Equity

The market value of assets is calculated using annual free cash flows and discounting them to their present value. This is done by subtracting cash flows from investing activities from cash flows from operating activities (CFFI-CFFO). This number is then discounted by the WACCbt (15.73%). Note that the before-

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tax WACC is used to avoid the consideration of taxation twice since the after-tax net income already takes it into account.

In this model we break up future cash flows into years 1-10 and 11-infinity. Years 1-10 are discounted to the present value annually and years 11 and on are discounted as a perpetuity. The lump sum of these present values is considered to be the present value of Myers’ assets.

Using the equation stated previously and the assumption that the book value of liabilities equals the market value of liabilities, we are now able to calculate the market value of equity. To preserve consistencies in pricing times, we multiplied the calculated prices given in the model by a 5-month future value factor. We then used the WACICBT and a range of reasonable growth rates to calculate the free cash flow model prices. We are assuming that the most logical prices fall under perpetuity growth rates between 3 and 5 percent and our calculated WACIC of 15.73%.

Based on the results from the discounted free cash flow model, even in the best

case scenario of a growth rate of 1% and a WACIC of 11.73%, the stock price is valued at $14.70, $1.27 below our calculated lower bound. This reconfirms that the stock is overvalued, however, this model can be highly affected by changes in the WACICBT and should be analyzed with skepticism.

Residual Income Model Residual income is stated as the income that remains after the opportunity cost

of capital is deducted. The sensitivity analysis based on residual income has the highest degree of explanatory power associated with it for several reasons. This model places a higher value on year-to-year inputs rather than the value of perpetuities. These factors increase explanatory power due to higher accuracy in short-term forecasts rather than long-term. This model is driven by the difference between net income and the benchmark income (income generated when delivering the return on equity required by

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the shareholders). Residual income is calculated by taking net income minus the previous year’s book value of equity, multiplied by the firm’s cost of equity. The inputs that are forecasted for this model are much more reliable than the ones used for the free cash flow model. If the residual income is positive, the firm is adding value, and if the residual income is negative, it is destroying value for the shareholders. In the long-run, a firm must deliver the cost of equity and the residual income must converge to zero. Here is the stated Residual Income Analysis.

In the reasonable perpetuity growth rate and cost of equity range, the model shows that Myers Inc. is currently undervalued.

The following is the restated Residual Income Analysis:

Abnormal Earnings Growth Model The Abnormal Earnings Growth model operates under the same criteria as the residual income model as it compares forecasted earnings to a benchmark value. Inputs for this model include dividends paid out, and net income. However, because this model uses forecasted numbers it is susceptible to errors because we don’t use a base year in comparison. Relative to the residual income model this AEG model has a high degree of explanatory power, thus the results calculated with this model will have a high influence on our recommendation for Myers’ Incorporated.

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For this model the benchmark used is “normal” income, this is calculated by taking the previous year’s net income and multiplying it by one plus the cost of equity. This value is then compared to the cumulative dividends earnings, the sum of the year’s net income and dividend reinvested earnings (the previous year’s net income*cost of equity). In the long run, a firm must deliver the cost of equity so residual income must converge to zero. To make this model more comparable to the prices observed at 4/1/2015, we grew the model share price by the cost of equity for the portion of the year. We then ran the sensitivity analysis to determine the effect of the change in cost of equity or growth rate would have on the price.

This model shows that, within a reasonable range of perpetuity growth rates using the equilibrium cost of equity, the stock is undervalued. Under all the growth rates, an increase in cost of equity increases the stock price even more. This is supported by the check figures. While this model does show the value of the firm in the near future, this should be viewed with skepticism due to its sensitivity to changes in cost of equity.

Long-Run Residual Income Model

The Long run residual income Model operates under the same principles as the Residual Income Model. A firm with positive residual income will add value, and a firm with negative income will destroy value, both values should converge to zero in the long run. The driver for this model is residual income. The income aspect of this model is determined from an initial ROE and long run perpetuity growth rate. The market value

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of equity can be calculated by adding residual income of this model to the book value of equity. We assume that residual income converges to zero where the cost of equity equals ROE, using this formula.

MVE = BVE0 + BVE0 (1+ (ROE -Ke)/ (Ke -g) In this formula, the market value of equity depends on ROE, Ke, and g. A

sensitivity analysis must be used to assess the valuation response to changes in these variables. Because this model is a three-dimensional valuation, we will construct the sensitivity analysis in two portions, one holding the ROE constant and the other portion will hold the growth rate constant.

As shown in the above tables, Myer’s Inc. is overvalued in our 10% analyst position even though in the best case scenarios, Myers can be considered fairly valued. As a result of conducting multiple sensitivity analyses holding the growth rate and ROE constant, we can be confident in the models that they suggest the true value of Myer’s Inc.

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The following model is based on the restated cost of equity as it may be a better representation of the firm.

This model shows that, within a reasonable range of growth rates, cost of equity and return on equity, the stock is overvalued. In the most optimistic assumptions the stock would be fairly or even undervalued, but those assumptions would never happen in the real world. These are assumptions like 26% ROE or a 5% cost of capital. We can definitively say that the stock is overvalued under the Long-Run Residual Income Model.

Final Recommendation

Comparable and intrinsic valuation models will be used to give our final

recommendation. Even though the value of all of the models will be used to value

Myers Industries, we will give greater weight to those that have higher explanatory

power. Models that provide the highest explanatory power for Myers are the Long Run

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Return on Equity Residual Income and the Residual Income model. Both of these

models show that Myers’ is overvalued at the calculated cost of capital or ROE. Our

recommendation for Myers Industries stockholders is to sell; holding this stock would

result in excess risk being taken on by the investor.

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Appendix:

As-stated Ratios:

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Re-stated Ratios:

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Balance Sheet as Stated and Restated 2009-2012

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Balance Sheet as Stated and Restated 2012-2014

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Income Statement as stated and restated 2009-2012

Income Statement as stated and restated 2009-2012

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Forecasted Income Statement and Common Size statement: 2009-2024

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Forecasted Income Statement (restated): 2009-2024

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Forecasted Balance Statement: 2009-2024

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Common Size Ratios: 2009-2024

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Balance Sheet Restated: 2009-2024

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Balance Sheet Restated Ratios: 2009-2024

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Statement of Cash Flows: 2009-2024

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Sources: Carmichael, Douglas R., Ray Whittington, and Lynford Graham. Accountants' Handbook Financial Accounting and General Topics. New York: Wiley, 2012. Web. Siegal, Philip. “The Measurement and Recognition of Intangible Assets.” Journal of Business and Public Affairs. Volume 1. Issue 1(2007). http://www.scientificjournals.org/journals2007/articles/1006.htm. February 18 2015 Intermediate Accounting 14th Edition: Kieso, Weygandt, Warfield Myers Industries, Inc. 10-K (2008-2014) Cooper Tire & Rubber, 10-K (2008-2014) Berry Plastics, 10-K (2008-2014) Hyster-Yale , 10-K (2008-2014) "Yahoo Finance - Business Finance, Stock Market, Quotes, News." Yahoo Finance. N.p., n.d. Web. 05 May 2015. "The Wall Street Journal - Breaking News, Business, Financial and Economic News, World News & Video - Wall Street Journal - Wsj.com." The Wall Street Journal - Breaking News, Business, Financial and Economic News, World News & Video - Wall Street Journal - Wsj.com. N.p., n.d. Web. 05 May 2015. "Bloomberg Business." Bloomberg.com. Bloomberg, n.d. Web. 05 May 2015.

"YCharts: The Financial Terminal of the Web-Stock Screener, Financial Research, Stock Charts and Economic Indicators."YCharts: The Financial Terminal of the Web . N.p., n.d. Web. 2 Dec. 2014.