Beyond EarningsApplying the HOLT CFROI and Economic Profit Framework
Step up stock selection with advanced valuation techniques Beyond Earnings provides finance professionals with the most advanced techniques available for complex valuation and corporate performance analysis. Deep in detail and comprehensive in scope, this book features the first empirical discussion of mean-reversion in corporate profitability and growth, with expert guidance toward practical solutions. By focusing on cash flow and the economics of a company’s performance, the discussion relates a more effective process for stock screening, selection, and valuation. Step-by-step calculations guide you through the application of the HOLT CFROI and Economic Profit approaches for measuring operating performance, and expert insight from Credit Suisse researchers and consultants sheds new light on familiar situations. Stock selection is the critical point in the performance matrix, and screening and valuation practices weigh heavily into a firm’s performance. As investors face increasing pressure to perform at ever-higher levels, this book provides essential analysis methods that help paint a more complete picture of a potential investment’s performance. Assess a firm’s performance accurately by adjusting for accounting distortions Calculate economic profit and CFROI Estimate future cash flow, profit streams, and the firm’s value Model terminal value and eliminate the perpetuity assumption The effort to outperform benchmarks and exchange-traded funds grows increasingly Sisyphean as professional investors face mounting pressure from all sides. When the market is not performing to the level required to attain strategic goals, smarter stock selection becomes the lynchpin of high-performing firms. Advanced modeling provides an edge over traditional models in that it paints a truer picture of a corporation’s status, and extends that vision further into the future to facilitate more educated decision-making. Beyond Earnings is the professional manual to enhanced stock analysis and valuation, with invaluable guidance you won’t find anywhere else.
Introduction xix The Pricing Puzzle: Foundational HOLT Concept and a Key to Better Valuation xix Overview of Book Chapters xxvi Who Are We and What Do We Hope to Achieve xxviii I Financial Performance Assessment 1 Never Forget the Golden Rule: Pursue Strategies with Positive NPV 3 2 The Flying Trapeze of Performance Metrics 31 3 Accounting to Cash Flow Return on Investment 57 II Discounted Cash Flow and Economic Profit Valuation 4 What's ItWorth? Valuing the Firm 113 5 Quantifying the Value and Risk of a Company's CAP 151 6 HOLT Economic Profit 191 7 Risk, Reward, and the HOLT Discount Rate 217 III Value Driver Forecasting 8 The Competitive Life-Cycle of Corporate Evolution 257 9 The Persistence of Corporate Profitability 281 10 Forecasting Growth 303 11 Evaluating Market Expectations 321 12 Closing Thoughts 359 Index 363
DAVID A. HOLLAND is an independent consultant who serves as a senior advisor to Credit Suisse and is an adjunct professor at the University of Cape Town Graduate School of Business. Formerly, he was a managing director at Credit Suisse based in London. David oversaw HOLT Valuation and Analytics, the research and development arm of Credit Suisse HOLT, and ran their global Custom Solutions Group. BRYANT A. MATTHEWS is the senior director of research for Credit Suisse HOLT. He has over 20 years of professional experience valuing stocks and helping professional investors improve their stock selection process and valuation models. His research on understanding quality and fade has been adopted by professional investors around the world and led to numerous innovations in the flagship Credit Suisse HOLT Lens application.
Beyond Earnings is targeted at investors, financial professionals, and students who want to improve their ability to analyze financial statements, forecast cash flows, and ultimately value a company. The authors demonstrate that reported earnings are easily gamed by accounting shenanigans and reveal how commonly used profitability measures such as return on equity can be misleading. Because earnings and P/E ratios are too unreliable for valuation, this book takes you beyond earnings and shows you how to apply the HOLT CFROI and Economic Profit framework in a step-by-step manner. A better measure of profitability results in improved capital allocation decisions and fundamental valuations. This ground-breaking book offers the first practical in-depth discussion of how profitability and growth fade, and shows how to put this information to work right away. The authors introduce their trailblazing Fundamental Pricing Model which includes fade as an adjustable value driver and can be used to value the impact of business model disruption. The authors leave no doubt that building and maintaining a sustainable competitive advantage is critical to a company's valuation. As the authors explain, the key to superior stock picking is understanding the expectations embedded in a stock's price and having a clear view of whether the company can beat those expectations. The HOLT framework has been rigorously field tested for over 40 years by global investment professionals to help them make better stock picks and by corporate managers to understand the expectations embedded in their stock price. Beyond Earnings is an indispensable guide for investors who use HOLT Lens and want to improve their odds of outperforming the competition.
PRAISE FOR BEYOND EARNINGS "Holland and Matthews show why successful investors (and corporate managers as well) must focus on cash flow metrics in analyzing and valuing a business. This book is essential reading for anyone who wants to make successful investment decisions." —William Priest, CEO, and Steven Bleiberg, Managing Director, Epoch Investment Partners, authors of Winning at Active Management: The Essential Roles of Culture, Philosophy, and Technology "Holland and Matthews do an amazing job articulating the theoretical underpinnings of valuation and value creation without limiting or compromising the practical application of the DCF methodology." —Frank Ieraci, Head of Active Fundamental Equities, Canada Pension Plan Investment Board "Beyond Earnings belongs on the desk of every investor, corporate manager, and student of financial markets who seriously want to understand how companies create value for their shareholders and other stakeholders of corporations." —Hon. Professor Dr. Jan Viebig, Goethe University Frankfurt; editor and author of Equity Valuation: Models from Leading Investment Banks "If the 'science' of Economics can be described as often 'dismal' then the discipline of Equity Valuation could easily be described as mostly 'amateurish'. Holland and Matthews have done more than anyone to help professionalize the investment industry's approach to financial analysis and business valuation." —Mark Ferguson, Founding Partner and Co-Chief Investment Officer, Generation Investment Management "Beyond Earnings brings erudition and sense to equity valuation and financial performance analysis, and then links them clearly to investment decision making." —Michael O'Sullivan, Chief Investment Officer, International Wealth Management, Credit Suisse "Value conscious executives from listed corporates will find the time invested in studying Beyond Earnings immensely rewarding." —Patrice Lambert - de Diesbach, Head of Investor Relations, Orange Group "Most investors fall victim to extrapolation. Holland and Matthews demonstrate in their must-read book that the value of a business is not only driven by its rate of growth and level of profitability, but also by its rate of profitability decay." —Roger Merz, Head of Global Equities, Vontobel Asset Management