Details

Beyond Earnings

Applying the HOLT CFROI and Economic Profit Framework
1. Aufl.

von: David A. Holland, Bryant A. Matthews
33,99 €
Verlag:	Wiley
Format:	PDF
Veröffentl.:	04.12.2017
ISBN/EAN:	9781119440505
Sprache:	englisch
Anzahl Seiten:	416

In den Warenkorb

Als Gutschein

DRM-geschütztes eBook, Sie benötigen z.B. Adobe Digital Editions und eine Adobe ID zum Lesen.

Beschreibungen

Titelbeschreibung

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. 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 want to improve their odds of outperforming the competition.

Inhaltsverzeichnis

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 Key Learning Points 3 Introduction 4 What Do Corporate Financial Managers Do During the Day? 6 What Is Value? 8 The Golden Rule of Financial Decision Making 12 Back-of-the-Envelope Basics 15 Is the NPV Rule Foolproof? 20 The Price of Short-Termism 22 Thinking Clearly about Actions, Reactions, and Value 28 2 The Flying Trapeze of Performance Metrics 31 Key Learning Points 31 Measures of Corporate Performance 32 Return on Equity 33 What about Debt and Leverage? 36 Return on Assets 39 Return on Invested Capital 39 P/E as a Valuation Metric and Discounted Cash Flow Valuation Approach 44 Hallmarks of a Sound Economic Performance and Valuation Model 51 Chapter Appendix 53 3 Accounting to Cash Flow Return on Investment 57 Key Learning Points 57 Is CFROI a Better Measure of Performance? 58 Return on Invested Capital (ROIC) 62 Cash Return on Gross Assets (CROGA) 63 Cash Flow Return on Investment (CFROI) 63 CFROI Adjustments Using Amazon’s 2013 Annual Report 65 Inflation-Adjusted Gross Investment 66 Depreciating Assets 68 Gross Plant Recaptured 81 Total Depreciating Assets 81 Non-Depreciating Assets 82 Asset Life 89 Gross Plant Asset Life 90 Life of Capitalized Operating Leases 91 Capitalized R&D Life 91 Calculating the Life of Depreciating Assets 91 Gross Cash Flow 94 Net Income after Tax 95 Depreciation and Amortization 97 Interest Expense 97 Rental Expense 98 Research and Development Expense 98 Net Monetary Asset Holding Gain 99 FIFO Profits 99 Stock Compensation Expense 100 Pension Expense 101 Minority Interest 102 Special Items 102 CFROI Calculation for Amazon 103 Understanding the Relative Wealth Chart 105 A Comment on Goodwill 106 Chapter Appendix: Gross Plant Recaptured 109 II Discounted Cash Flow and Economic Profit Valuation 4 What’s It Worth? Valuing the Firm 113 Key Learning Points 113 A Review of Conventional Valuation Approaches 114 The Entity Free Cash Flow Approach 114 Valuing the End of the Line 118 Economic Profit Approach 124 What Is Fade? 127 Fade in Economic Profit Equation 129 HOLT Approach to FCFF Valuation 130 Nominal Gross Cash Flow 130 Total Investment 132 Debt and Equivalents 136 Valuing Different Forecast Scenarios for Amazon in the HOLT Framework 138 Valuing Air Liquide in HOLT Lens 145 5 Quantifying the Value and Risk of a Company’s CAP 151 Key Learning Points 151 Introduction 152 The Worst Investment I Ever Made 154 Quantifying the Magnitude and Sustainability of CAP 158 Thought Experiment: The Valuation of Core Unlimited 164 The Probability of Permanent Disruption 168 The Characteristics of Competitive Advantage 169 Fade Is a Value Driver 172 The Fundamental Pricing Model 172 The Value Driver Tree 174 ROIC 174 Investment Growth 175 Fade 175 Cost of Capital 177 Investment Growth Is a Value Driver 177 Applying the Fundamental Pricing Model 178 Final Thoughts for the Moment 183 Chapter Appendix 184 Valuation Mathematics 184 Inputs for Valuing Macy’s and Assessing Its Competitive Advantage Period 186 A Detour Through the Twilight Zone: Making Sense of P/E 187 6 HOLT Economic Profit 191 Key Learning Points 191 Introduction 193 Calculating CFROI as a Ratio 196 HOLT Economic Profit 200 The Power of Simplicity: Spread, Fade, and Growth in an EP Framework 204 Using Economic Profit to Measure the Value of Acquisitions 205 Decomposing Value Creation into Delta EP Components 208 What about Goodwill? 210 Case Study: Danaher Corporation 212 7 Risk, Reward, and the HOLT Discount Rate 217 Key Learning Points 217 Risk, Return, and Diversification 218 What Is Risk? 221 How Do Corporate Managers Discount Cash Flows to Present Value? 223 How Should Investors Think about Risk When Discounting Cash Flows? 223 How Large Is the Equity Risk Premium (ERP)? 226 Should I Use the Arithmetic or Geometric Average? 228 Other Risk Factors to Consider 228 Introduction to the HOLT Approach of Estimating a Firm’s Discount Rate 231 Relating the HOLT Discount Rate and Framework to CAPM and APV 237 What Type of Discount Rate Is the HOLT Cost of Capital? 238 Valuation Method Equivalence 239 Capital Cash Flows 243 Cost of Capital and Its Relationship to Debt 243 Chapter Appendix: Do Equity Discount Rates Mean Revert? 245 General Observations about Annual Changes in the U.S. Discount Rate 247 How Does the Monthly Change in the U.S. Discount Rate Behave? 249 Does the Discount Rate Mean-Revert? 250 How Do Changes in the Discount Rate Manifest in the Equity Risk Premium? 252 The Bitter Truth about Mean Reversion 253 III Value Driver Forecasting 8 The Competitive Life-Cycle of Corporate Evolution 257 Key Learning Points 257 Introduction 258 What Is Fade? 262 The Competitive Life-Cycle 262 Determining a Firm’s Life-Cycle Position 264 Question Marks (Early Life-Cycle) 265 Stars 267 Cash Cows 270 Dogs (Turnarounds or Restructuring) 274 Final Remarks on the Competitive Life-Cycle 276 Essential Facts about the Competitive Life-Cycle 278 9 The Persistence of Corporate Profitability 281 Key Learning Points 281 Long-Term Real Return on Investment 282 The Long-Term Real Required Rate of Return 283 Measuring Persistence 286 Transition Matrices as a Means of Quantifying Fade 286 Industry Persistence: Does Industry Matter? 287 Reversion to the Mean 290 Competitive Advantage and Its Effect on Fade 292 Industry CFROI Persistence 295 Does CFROI Persistence Vary over Time? 296 Putting It All Together: Developing a Mean-Reverting Forecast Model 297 Conclusion 300 10 Forecasting Growth 303 Key Learning Points 303 Median Real Asset Growth Rate 306 The Average Growth Rate as Companies Mature 307 Is Corporate Growth Mean-Reverting? 309 The Sustainability of Growth 312 Forecasting Growth 313 Measuring a Firm’s Sustainable Growth Rate 313 Why HOLT Uses a Normalized Growth Rate 315 Forecasting Growth: Near-Term and Long-Term Dynamics 317 Conclusions 319 11 Evaluating Market Expectations 321 Key Learning Points 321 The Relative Wealth Chart as a Decision Aid for Efficiently Assessing Stock Opportunities 322 Distilling Expectations from a Stock Price 323 Can It Beat the Fade? 326 The Green Dot 328 Thinking about Expectations at Different Life-Cycle States 332 Why the Green Dot Is So Helpful 336 Picking Stocks Across the Life-Cycle 340 Question Mark (Tesla) 340 Star (Amazon) 343 eCAP (Nestlé) 346 Cash Cow (DuPont) 348 Dog (BP) 349 Final Remarks 353 Chapter Appendix: Gauging Expectations Using PVGO 356 12 Closing Thoughts 359 Index 363

Autorenportrait

DAVID 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 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.

Back cover copy

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