Z Score Model analysis of Tecumseh Products Company |
BY: Shelly Koeck
September 24, 2012
Tecumseh Products Company is an industrial goods company that manufactures hermetically-sealed compressors for residential and specialty air conditioning, home refrigerators and freezers, and commercial refrigeration. Tecumseh competes in the same arena as General Electric Company. Tecumseh Products Company employees 6,100 people and are located in Ann Arbor, MI. The company currently has 18.48 M outstanding shares of which 311.16 K shares are at this time shorted by private and institutional investors with about 12.8 days to cover all short positions. Tecumseh has accumulated about 46.2M in cash with 7.8 M of positive cash flow from operations.
The Z-Score is a multi-factor model that measures the financial health and economic stability of a company. The score is then used ...view middle of the document...
Fourth Factor: Market Value of Equity / Total Liabilities= 110.5M/291.5M=.38
Fifth Factor: Revenue / Total Assets= 820.4M/562.5M= 1.46
Tecumseh Z Score or the sum of all factors was 2.55. Based on Tecumseh’s Z-Score I would not consider them healthy enough to invest in or loan any funds to. In Tecumseh’s latest press release they state that net sales for the second quarter of 2012 had decreased 8.3 percent versus the same period in 2011. The reasoning was stated as due to unfavorable foreign currency exchange rate effects. To compensate for the second quarter losses the company terminated some of their postretirement benefits, resulting in $45 million of non-recurring, non-cash curtailment gain. I consider these sorts of cost reductions to be desperate attempts to stay afloat. When a company starts to reduce its work force, cut or reduce benefits it has not chosen lasting change that promotes growth. Cost cutting measurements are favorable to growth when they reduce the raw material or cost of production. Labor and benefit cuts do not reduce the overall cost of goods sold unless you were over staffed. Reducing overall COGS (cost of goods sold) and the ability to increase inventory turns are more favorable. The selling and administrative expenses increase by $2.4M and accounted for 12.8% compared to 10.8% the previous year. This suggests a tightening of the purse strings. The S&A expenses should account for less than 10% of sales. Another thing that I noticed was down was the company’s cash and cash equivalents down from $49.6M to $46.2M. I feel if Tecumseh would reduce the amount of capital being spent on sales and administration costs reduce the true costs of goods sold or invest in IP or technology that will open the door to new markets and additional sources of capital. Cash is King; you must find a way to increase cash flow, whether it is by the reduction of COGS or the tightening of payment terms- the shorter the term on receivables and faster they are liquefied increasing cash flow. http://www.tecumseh.com/en/united-states