VALUE CREATION THINKING

 

     

LIFE-CYCLE PERFORMANCE

All lists of top/bottom corporate performers as have limitations.  In particular, problems arise when past shareholder returns are used to categorize firms.  On one hand, for a highly-levered firm with economic returns below the cost of capital, a stellar stock price appreciation for a period of time could easily be the result of only a modest improvement in operations.  This is certainly not representative of a genuine value creator.  On the other hand, a superbly-managed, value-creating firm frequently produces a shareholder return approximately equal to the market return.  This occurs when such a firm delivers exceptionally strong operating results that approximately match the exceptionally optimistic expectations already baked into its stock price.

To pinpoint a firm's life-cycle postion, three variables from the Credit Suisse HOLT global database are used: (1) % Future, (2) CFROI median of the last three years, and (3) CFROI estimated for one year ahead.   

The process begins with selecting the top 1,000 industrial firms by equity market capitalization.  All firms, regardless of industry sector, are sorted highest to lowest on % Future (see “% Future Scorecard" on this website).  The top 20 percent are graded “A” and so on with the bottom 20 percent graded “F.”  Within each industry sector, firms are sorted highest to lowest on past three-year median CFROI and estimated year-ahead CFROI and, as before, grades of A, B, C, D, and F are assigned.

TOP AND BOTTOM PERFORMERS

For firms with grades AAA, high reinvestment is very likely to be value creating.  FFF firms may be encountering short-term operating shortfalls or there may be a genuine risk that the firm’s culture and/or strategy is value depleting.  The AAA and FFF lists are sorted highest to lowest on % Future. 

Click here for a list of Top Performers.
Click here for a list of Bottom Performers.

Looking at the above lists, company names probably come to mind for which one would like to see similar data.  For example, Amazon is ABB since its massive reinvestment tends to depress CFROIs. Facebook is ACA since its year-ahead CFROI is graded A but its past three-year median CFROI is C. Apple is CAB as investors have substantially lowered their assessment of long-term profitability with a % Future grade of C.  This life-cycle data (updated quarterly) is available for 1,000 firm as detailed below.

CFROI CHANGE FOR 1,000 INDUSTRIAL FIRMS

Click here for a list of 1,000 industrial firms that contains data for the three key variables, including A, B, C, D, and F grades.  In addition, a fourth variable, CFROI Change, is shown with a firm’s grade based on the firm’s relative position within its industry sector.  CFROI change is the difference between the year-ahead CFROI and the past three-year median CFROI.  This list is sorted highest to lowest on CFROI change within each industry sector.  Portfolio managers and security analysts who use the Credit Suisse HOLT global database pay particular attention to CFROI change.  It alerts them to a possible fundamental change occurring such that a firm’s long-term “fade” (see the life-cycle framework diagram) is becoming much more or less favorable.  Big winners/losers in the stock market are associated with unexpected big positive/negative CFROI change.
     
 

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