Hello sir,
How did you determine that a company is a blue chip?
How did you determine that a company is a blue chip?
From: Renzie Doem
The term "blue chip" came from the game of poker. In poker, blue chips have the highest value.
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Blue chip stocks are seen as a less volatile investment than owning shares in companies without blue chip status because blue chips have an institutional status in the economy. Investors may buy blue chip companies to provide steady growth in their portfolios.
According to Investopedia, a blue chip company is a nationally recognized, well-established and financially sounds company. Blue chips generally sell high-quality, widely accepted products and services. Blue chip companies are known to weather downturns and operate profitably in the face of adverse economic conditions, which help to contribute to their long record of stable and reliable growth.
When you see PLDT and Globe’s advertisements and tickers, it will flash into your mind immediately that these two companies are big and blue chip companies. How about Megaworld, is it a blue chip company? Perhaps if I did not mention it here you don't know that this company even exists. Now, let’s take a look at Megaworld’s credentials if it will qualify as a blue chip company based on Investopedia’s definition.
Nationally recognized
I worked at Eastwood City before in one of the international BPOs out there. Within the area stand the high rise buildings that housed the BPOs and call centers of various international companies. Major tenants were IBM Global Services, Accenture, Dell, Citibank, eTelecare, Stellar, and Atos.
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As a young professional, my interests’ lay on the various companies located within Eastwood City. One of my common inquiries is knowing the company that offers higher salary and provides generous benefits to employees. Another one is the nightlife. I am more interested in knowing the discos, restaurants, nightclubs and other nightspots. I don’t care on who built the Eastwood City.
How about the minimum wage earners whose main concern in their everyday life is to put food on the table? Will they ever be engaged in going to Libis and let their hard earned money spend on expensive stuff? Sure, they commute everyday and see the advertisements displayed across Metro Manila but will they ever take a second look?
PLDT and Globe’s ads can be seen everywhere. When you switch on your television more likely than not you will see a Smart, Globe, and SunCellular commercial. When you go to a sari sari store, the posters of PLDT and Globe will welcome you. Texting has become a vital part of our lifestyle. In fact, our country is being referred to as the texting capital in the world. Texting doesn’t apply to the affluent group only, it applies to everyone. It knows no boundaries from Filipino A to E. It is available for everyone. Can the same be said to Megaworld? No.
Now, if you are going to put the description of a nationally recognized in the context of A to E people, it is not appropriate. I am not a marketing expert but I know that ads are placed to where the target market spends most of their time. Businessmen and investors knew that Megaworld has been relentless in its real estate business putting one huge projects to another. On its leadership rests one of the richest men in the Philippines, Andrew Tan. Its 2011 net income is a staggering 8.16 billion pesos!
If you are an investor or perhaps a professional employee working in the corporate hierarchy, then I know you must have known this Megaworld company. In the condominium crazy generation where condos are sprouting like mushrooms everywhere, real estate companies are occupying malls with salesmen at the front door of the malls.
Being nationally recognized doesn’t mean a company needs to be widely known from A to E people to become a blue chip. What is essential then is that we all know what these companies are and who their customers are.
Well Established
What do we mean by well established? Well established means that a business has been in existence for quite some time and is successful.
Is Megaworld existing for quite some time and successful? Megaworld Corporation was founded by Andrew Tan and incorporated on August 24, 1989. Megaworld has been existing for 23 years which is not quite some time in the context of the legal life of corporations.
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The legal life of a corporation is 50 years only but it can be extended for another 50 years and another 50 years and another 50 years and another...yes, it can be extended indefinitely. Ayala Corporation2 is the oldest conglomerate in the Philippines. It’s been in existence for 180 years already! BPI3 is the oldest bank in the Philippines. It was founded in 1851. Ayala Corporation and BPI are well established, financially sound, stable companies. No wonder, they are blue chip companies.
Another factor to consider in being well established is that these blue chip companies are expected to continue to operate in the next 50 years. Yes, maybe you are old by then but these blue chip companies will most likely outlived you by a hundred years or so as shown by Ayala Corporation and BPI.
If you compare the years of existence between Ayala Corporation and Megaworld, it is a mismatch. Ayala Corporation is 180 years already while Megaworld is 23 years old only. Why then Megaworld is considered a blue chip company? The answer lies in the expectations that Megaworld will still be in business 50 years from now as a stable and profitable company. From 2007 to 2011 its net income has grown from 3 billion pesos to 8 billion pesos and still growing. Like I always said, we cannot predict the future of a company but history can give us a glimpse on what the future can be. This principle applies to Megaworld and other blue chip companies incorporated in 1950s onwards.
Financially Sound
Financially sound means a company has strong, secure and reliable financials. I am not talking about the sound which we hear every day. That is a noun. I am talking about sound as an adjective which describes the financial health of a company. A financially sound company indicates that the company is profitable, has adequate funds and assets for their operations and expansions.
If the company is financially sound, management can capitalize on the existing opportunities in the market, expand the company’s operations and spend more on marketing and training. More importantly, it can weather the economic crisis (i.e. recession in the Philippines) and come out of it strongly.
Is Megaworld financially sound? With 8 billion pesos of net income in 2011, coupled with huge amount of assets and resources, there’s no doubt that Megaworld is financially sound and is considered a blue chip company.
PSEi
What is PSEi? PSEi means Philippine Stock Exchange Index. This is a list of 30 companies listed in the Philippine Stock Exchange that have large market capitalization. In other words, they are the who’s who of Philippine Stock Exchange. The big boys. The heavyweights. The titans. This list includes PLDT, Globe, Ayala Corporation, BPI, Megaworld, Jollibee, etc.
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Let’s take a look at the qualifications to become a member of PSEi4.
1. Free float level of at least 12%.
2.Trading liquidity must be among the top 25% median daily value per month for at least nine out of twelve months.
3.Top 30 based on full market capitalization
Now let’s see if Megaworld will qualify as member of PSEi, the heavyweights of Philippine Stock Exchange also know as blue chip companies.
Free float level of Megaworld is 39%4. Passed.
Trading liquidity of Megaworld is in the top 25% median daily value per month. Passed.
Megaworld’s full market capitalization is 57.2 billion pesos as of today. Ranks number 27 among the PSEi participants. Passed.
All companies listed in PSEi are universally recognized as blue chip companies. However, there are companies not included in the PSEi that are considered blue chips. Security Bank (SECB) is not included in the PSEi but it is considered as a blue chip company because it met the definition of a blue chip company.
This definition of Investopedia is not absolute. In fact, there is no absolute consensus on what makes a stock a "blue chip," but most would agree that any stocks in the Dow Jones Industrial Average are blue chip stocks. This does not mean that they are bullish on these stocks, but rather, that they are companies that have stood the test of time and are almost guaranteed to be around another 50 years or longer.1
4http://www.scribd.com/doc/101834914
is CPG a blue chip company?
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