AEO Board Screening Test Results
In prior postings, I’ve mentioned the American Eagle message board on Yahoo! Finance — a rare collection of thinking and contributing investors (long, short, and agnostic on that stock). A recent discussion with Steve West on that board prompted an idea. If the depression of Bear Markets tend to represent buying opportunities and if we are now officially in a Bear Market, what stocks do other, knowledgeable investors recommend as possessing above average management and cheap valuations, and how would they fare when run through my initial analytical screen?
Because no screen is perfect and there are any number of methods for valuing stocks, why limit the exercise to just my screen, and, equally, important, isn’t it likely that the best selections of others would point out the short-comings in my screening approach? That was the initial idea, and, when it was put to the board, the response was gratifying. Nearly 80 stocks were recommended — 68 after eliminating duplicates –, and one poster offered a list of short stocks for consideration.
Before getting into the meat of the data, I should note that I was not able to get valuation data for any financial stock (banks, investment houses, insurance firms). Morningstar does not provide statement of cash flow data for financials. Consequently, The screening results for financial stocks looked like:
Note that all but LEI provide Shareholder’s Equity growth rates as the only measure to come through “clean.” LEI (LUCAS ENERGY), of course, is not a financial stock. Unfortunately, the data for LEI was not available through Morningstar (my data source) when the screen was run after close of business on Friday, July 11, 2008. It appears the reason for this is the recent release of quarterly financials, which have not been updated in the Morningstar system. [Note: The pending quarterly data represents a virtual, short-term embargo by Morningstar. The results reported here, however, represent full-year calculations.)
To make the chart for the remaining stocks more legible, I’ll divide the results (presenting the ROA data separately).
Due to issues with SnagIt (the software used to create the images), I had to break these up into groups of 25.
The Div/0 results follow from the number of years of reported data. P/Adj Bk and EPV/RV (explained below) require seven years of data, for example. Only a small number of stocks have been on the market for less than five years, however. So, few incomplete results litter the calculated fields.
Before moving to the ROA results, allow me to provide an explanation key for the criteria in the results just presented.
Name – Technically, this should read “Stock Symbol.”
Discount – This is the level of discount to which the stock is currently selling using Discounted Cash Flow analysis. It assumes the stock will grow at the same rate as for the prior decade, where the growth rate is the median of rolling five-year and seven-year medians. For the second decade, by convention, it uses a five percent growth rate. These future cash flow projections are discounted to present dollars using a 15 percent rate, and it assumes current Shareholder’s Equity represents the firm’s continuing value. Negative numbers indicate the stock is overvalued by this measure, and numbers greater than 1.0 indicate that the stock has a negative intrinsic value. Numbers between 0.00 and 0.99 indicate stocks which are undervalued by this DCF model. The higher the number (up through 0.99) the more discounted the stock’s current price. A stock with a result of 0.60 is selling at a 60 percent discount. The color threshold, turning to green, for this measure is 50 percent, for value investors seeking at least a 50 percent margin of safety.
P/Adj Bk – Price-to-Adjusted-Book provides the Price-to-Replication Value. Replication value is the theoretical amount a new entrant into the market would need to invest to achieve the same standing as the company under consideration. Non-cash items are eliminated from the company’s book value, liabilities are recorded at full value, and non-current assets are discounted at the rates suggested by Columbia Business School Professor Bruce Greenwald (a technique created by the late Benjamin Graham, also a Columbia professor). Adjustments are made to account for marketing and advertising expenses and research and development (for firms having R&D costs). Stocks selling at a cost greater than 2.5 become increasingly red, while those sell at less than 2.5 are increasingly green.
EPV / RV – Compares Earnings-Power Value with Replication Value, where EPV reflects the value added due to a company’s franchise. This metric considers just the most recent year of reported data. Later, we will consider the frequency with which the company’s results were favorable. This measure indicates the degree to which the company’s franchise benefited the investor. In general, when EPV exceeds RV, the investor benefits. More importantly, if RV exceeds EPV, the cost of capital invested toward growth exceeded the realized benefits of that growth. Because capital invested this year may not render a return to the investor in this same year, it is necessary to consider this metric over a number of years. Similarly, a single-year’s favorable results are insufficient to judge the efficiency with which the company is parlaying the company’s franchise to the investor’s benefit. it is, however, helpful to know whether EPV exceeded RV in the most recent year of reported data, since a failure to do so may indicate the start or continuation of a trend.
CROIC/WACC – Cash Return on Invested Capital divided by the Weighted Average Cost of Capital. This is another measure designed to determine whether the company’s investments toward growth or expansion render a return to the investor. In general, CROIC should exceed WACC – the more the better.
CROIC – Growth rate over the years for Cash Return on Invested Capital, using the median of rolling five- and seven-year medians.
FCF / P – The Free Cash Flow yield at the current stock price.
Ops CF — Growth rate over the reported years for Cash Flows from Operations, using the median of rolling five- and seven-year medians.
FCF/CLIAB – The coverage of Free Cash Flows to Current Liabilities – a general measure of a firm’s ability to meet its obligations. Benjamin Graham recommended a 25 percent threshold.
FCF — Growth rate over the years for Free Cash Flow, using the median of rolling five- and seven-year medians.
ShE — Growth rate over the years for Shareholder’s Equity, using the median of rolling five- and seven-year medians.
PIO – Piotroski score. Created by University of Chicago Professor Joseph Piotroski as a screening tool to identify beaten-down value stocks that are ripe for a rebound. Scores of 8 or 9 represent the target for on this nine-point scale. For a more detailed explanation, I recommend the one provided by the Graham Investor website.
ALTZ – Altman Z-Score. A measure of a company’s exposure to bankruptcy risk, created in the 1960s by NYU Professor Edward Altman. Companies scoring 1.81 or below stand a 70 percent chance of bankruptcy in the next year or so. Those scoring between 1.81 and 3.00 are in the grey zone of uncertainty. Those scoring greater than 3.00 enjoy varying degrees of health sufficient to remove them from bankruptcy risk.
EPV>RV – Percentage of reported years where Earnings-Power Value exceeded Replication Value. As mentioned above, EPV should regularly exceed RV (with only occasional exceptions) – otherwise, corporate investments in growth fail to benefit the investor.
Years – The number of years for which Morningstar is providing financial data. In general, reported data over a small number of years is suspect. Most averaged data should have at least five data points (years) before the average is meaningful. For data that compares year-over-year results, six years of data is necessary in order to generate five data points.
Next, we turn to the Return on Assets figures. ROA results can vary from one reporting source to the next, due to how the tax effects on Profit Margins are calculated. The results reported here are consistent with the Dupont Disaggregation. In general, ROA can be broken out as Profit Margin times Asset Turnover. When the results for our list of stocks are plotted, it appears that most firms on the list emphasize profit margin over asset turnover.
Here are the ROA results:
Before moving on to the list of stocks one person recommended for shorting, it is important to note several things.
First, these are just the results generated by my screen. There are other screening approaches, and some may be better in part or in whole.
Second, this listing does not represent a zero-sum-game. Purchase of one stock does not prevent purchase of other stocks. Consequently, this should not be viewed as a beauty contest, where the comparative merits between stocks is judged.
Third, there are limitations with the screen. Another investor on the AEO board, Bill Ellard, more strongly emphasizes clean cash from operations (backing out Capital Expenditures for growth to determine what the Free Cash Flows would look like if the company were not investing in growth). Time permitting, Bill has agreed to run this list through his screener, and I hope to post those results here, as well.
Fourth, no stock should be accepted or rejected based on these results alone. Some may have excellent past performance results but poor future prospects in this changing economy — an argument often used to explain a less-than-optimistic outlook on retail, for example. By the same token, some stocks may have excellent forward prospects but seemingly poor past results. DCF analysis results for GPOR indicates negative cash flows and, therefore, a negative intrinsic value. This oil exploration company, however, is spending significant capital on infrastructure maintenance and, more importantly, growth of assets in a sector and economy that are abundantly favorable.
(Full Disclosure: I do not own GPOR stock.)
The point of this disclaimer is to note that, with each, further analysis and investigation is necessary and less-than-favorable results from the screen should not indicate than any stock represents a poor investment choice. In fact, I would be more inclined to investigate the companies not favored by this screen to identify what I and, most likely, the rest of the market missed. As mentioned at the start, these are the recommendations of a better-than-average group.
Now to the stocks recommended for shorting by one poster.
Most of the choices fell into the problems related to valuing financial stocks (banks, insurance, and brokerage houses). The incomplete data related to ARO has to do with the small number of reported years. While six years would normally be the minimum necessary for full data analysis, the numbers related to calculating advertising and marketing expenses in the first year came across as null values — depriving us of five year-over-year data points for this portion of Replication Value. This explains the Div/0 results in the P/Adj Bk and EPV/RV fields.
Turning to ROA, …
Which plots out as, …
The isoquant curves (red lines) are designed to help compare two firms with similar ROAs. AKS and ZEUS both have 11 percent Returns on Assets. Their Asset Turnover and Profit Margin postures, however, are very different. Does this make any difference for a short position? Well, I do not short, but it seems reasonable that it would during a recession — where reduced consumer spending would make asset turnover less important than the comparative buffer provided by the profit margin.
Finally, I appreciate the willingness of the AEO board on Yahoo! Finance to suggest their favored stocks at this point in the market’s cycle. Quite a few look very interesting, and I’ll be looking into them. As promised to my friends on the board, however, that will have to wait. My promise was to list the results without comment concerning individual suggestions, and, while using one stock as an example of my screen’s short-comings, I hope the reader will agree that this was a promise kept.
Rob,
Thanks for putting your time into this. It was a neat idea.
Lou
Lou
July 13, 2008 at 5:16 pm
Thanks, Lou. It was my pleasure, and I appreciate your contributing to the list.
Robert
rcrawford
July 14, 2008 at 1:55 am
hi rc.
somewhere underpinning all this is a the model using all these factors to arrive at a valuation. from a couple of your posts in various places i would think your ‘implied discount rate’ would come very close to a final statement of valuation, but if so that would make lots of factors you quote superfluous. do you have a specific valuation model that you are willing to share?
misanthropope
July 14, 2008 at 7:19 am
Robert -
Check the FCF/CLIAB column. it shows the OPS CF results.
Gerry
Gerry
July 14, 2008 at 9:42 am
Gerry, you are correct. I don’t know how it became changed — possibly a consequence of the recent computer crash and reprogramming; although, that portion of the model was not effected. I have, however, made the conversion and appreciate your catching my error.
Robert
rcrawford
July 14, 2008 at 10:39 am
Misanthropope, you’ve raised several items. First, the discount rate used with the DCF model is 15 percent, as indicated. DCF, however, is just one model employed. Also present are models for Replication Value (a Benjamin Graham technique) and Earnings-Power Value (a Bruce Greenwald technique). For both, no discount rate is required or used. With Replication Value, weights of 100 percent and less are employed on the assets side, depending on whether the assets are short or long term. Those that cannot be converted to cash quickly are reduced by as much as 33 percent. As for Earnings-Power Value, the cost of capital is used as the denominator in at least one calculation. I use the weighted average cost of capital (WACC). WACC, of course, does not employ a discount rate (in the NPV sense), but does apply an opportunity cost multiplier, and for that I add the current 10-year bond yield (3.95 percent at the time the screen was run) plus 8.6 percent to cover the market’s risk. That 8.6 percent multiplier is the highest (most conservative) estimate I’ve seen defended in any of the literature, while most writings on the subject recommend something on the order of 6 percent. Some also add the stock’s beta to the opportunity cost for the cost of equity. I do not, since the volatility of the stock is a function of the stock market and changes significantly from one day, week, or month to the next and is not a reflection of the company’s cost of capital or capital structure.
Beyond that, I’m not sure I understand the question.
As for releasing the system, that isn’t possible for a number of reasons. First, it is not a single model, nor is it a single program — there are, in fact, three programs, which will soon grow to four or five. Second, the files are automated (programmed, using VBA), which adds to the inter-relatedness of the files; therefore, none is a stand-alone file that will operate independently of the others. Third, portions of the system follow from joint efforts with others (consulting projects with investment houses), and release would violate standing agreements. And, fourth, prior release of one file (back when they were separable), led a recipient to go hog wild analyzing a large number of stocks on consecutive days, leading one data provider to conclude they were suffering a denial of service attack. The data provider reconfigured their end and this led to days of reprogramming on our end. Releasing the files as programmed to a larger audience would produce the same effect, even if the number of downloads per user was less significant. I should mention, as well, that I have about a year invested in the system and have become exceedingly risk adverse. The most recent spate of computer problems led to three weeks worth of work, alone, and that set of challenges was partially a self-inflicted injury (frying the hard drive plus converting to Office 2007). For several days, I was nearly convinced that no reform would repair the system, and the pucker factor was exceedingly high.
Thanks,
Robert
rcrawford
July 14, 2008 at 11:25 am
Robert -
also the CROIC numbers seem to be the one from last recent year not your median calculation
Gerry
Gerry
July 14, 2008 at 11:55 pm
Gerry, that is not an error in calculation but, rather, an error in the description. The CROIC/WACC figure is the most recent year’s figure, and I wanted to ability in on the summary screen to put that result in context. To do that, the CROIC figure should be from the same year or set of years.
I’ve wrestled with producing trended analysis of WACC, since I have the CROIC data for the decade (or however many years are available less than 10 years). This, however, is a function of, both, the number of shares outstanding and the price of those shares on the dates when the financials were reported. This would require downloading the stock price data and performing HLookUp functions to get the price data for both the reporting dates (two separate “queries”). While I know how to do this, it will require a good deal of work, possibly require manual download of the price history due to mismatches with the data source (a new issue), and, most problematic, the calculation speed of Excel 2007. This last item has been a significant frustration during the recent up-grade of the system. Microsoft increased the number of rows and columns on a spreadsheet and, therefore, the number of cells requiring recalculation. When the formulas are complex, the program absolutely drags, and, more disconcerting, the system is prone to crashing. To avoid this (or reduce its frequency), I’ve found it necessary to create, open, and close several different spreadsheets when the program runs and to “print” the data results (without formulas) on holding worksheets, from which other calculations reference. While this works adequately, it makes subsequent upgrades and change significantly more complex and time consuming. In my view, Microsoft Office 2007 is the first upgrade that is, in fact, a down-grade.
Thanks,
Robert
rcrawford
July 15, 2008 at 7:58 am
Robert -
at this point let me say thanks to you for all that you are doing here. I came across you and the AEO board some six, eight weeks ago while doing some DD on AEO and finding Bill Ellards seekingalpha report. I’ve been hooked to the board and your weblog since and must say that i have learned more about investing in that short period of time than in my entire previous life. I follow Bill and you on CAPS, try to duplicate your spreadsheets and just picked up a copy of Greenwald’s value investing to better understand what you are doing in regard to EPV. and besides of AEO I ended up picking up shares of HANS and UNH based on your weblog analysis. Again thanks a lot.
back to the CROIC and CROIC/WACC issue:
does it really matter how accurate you are with the WACC trending? since you are using such an extreme conservative number on the equity part, does it matter if you are 10% off? also, since a higher level of debt only leads to a lower WACC why not stay with the conservative 12.8% WACC no matter if there is debt or not?
that would let you get out of the dilemma of only posting last years CROIC, which I feel does not make for a good comparison between the different stocks. As an example, you give CRAY a green light with 15%, but the median calculation shows -16.3% due to all those years of negative CROIC.
Overall I believe that would lead to a better interpretation of your great comparison sheet.
Thanks
Gerry
Gerry
July 15, 2008 at 9:50 am
“does it really matter how accurate you are with the WACC trending? since you are using such an extreme conservative number on the equity part, does it matter if you are 10% off? also, since a higher level of debt only leads to a lower WACC why not stay with the conservative 12.8% WACC no matter if there is debt or not?”
Great questions. First, WACC is not trended in the model. The WACC figure is just for the most recent year for which data has been reported. I hope to perform trended WACC in the future, but, to arrive at this, it will be necessary to download the pricing data for prior years and, together with the shares data, calculate the equity value. To do this will require some VBA programming – involving all of the problems described in an earlier posted comment.
Second, if the number of shares is stable, the debt portion of WACC strikes me as far more important as a point of comparison to CROIC, but that is just my opinion. I originally began calculating them to determine whether a company was productively investing for growth to the stockholder’s benefit. The EPV / RV comparison does the same thing using a different approach, and I have the ability to trend that graphically (as was done with the in-depth analysis of several individual firms – QSII being the most recent example).
Third, I assume the 12.8 percent figure you mention references the opportunity cost for equity under WACC. That number, which is the combination of the risk-free cost of capital (10-year bond yield) and the market risk rate of 8.6 percent, changes daily as the risk-free cost of capital rate changes. Beyond using WACC as a point of comparison with CROIC, WACC is used in the EPV calculations (which you will learn about when reading Professor Greenwald’s book), and this is specific to the cost structure for each individual firm (once the debt portion is added to the equity portion of WACC). I know of one equities analyst who uses a flat rate (12 percent, in his case) for WACC, representing his required rate of return when calculating EPV, and there is some indication that Warren Buffett uses a threshold rate of 15 percent for certain calculations (such as the growth rate for owner’s earnings), but Mr. Buffett has not confirmed that, to my knowledge. Personally, I make the adjustments for each stock because that is the convention as taught in business school, represents the understood approach by those reading this blog (my conclusions would lack credibility, otherwise), and it is easily calculated now that the spreadsheet is automated .
The use of a single, self-selected figure would introduce an arbitrary measure into the calculation, of course (i.e., your choice of rate), and make it less easily described to others.
“that would let you get out of the dilemma of only posting last years CROIC, which I feel does not make for a good comparison between the different stocks. As an example, you give CRAY a green light with 15%, but the median calculation shows -16.3% due to all those years of negative CROIC.”
With the list of stocks recommended by the AEO board members (Yahoo! Finance), I posted the summary page created when I screen multiple stocks. When running the system for single stocks, I get the greater host of data provided when analyzing individual equities. That data includes the yearly CROIC results (which is more easily calculated than yearly WACC, described earlier).
Your point concerning the color coding, however, is well taken. The 15 percent threshold should reflect the growth rate, which is analyzed on two charts when performing full analysis of an individual stock. I’d like to have a summary entry that reflects this, as well, but I’m not sure about the threshold rate of growth. Thanks for giving me something to think about!
rcrawford
July 15, 2008 at 11:52 am
Robert -
couldn’t you just use debt and equity from the balance sheet to calculate historical WACC in conjunction with a data set of risk free rates and maybe even market risk rates for the last decade?
Gerry
Gerry
July 15, 2008 at 11:09 pm
Gerry,
There are several different approaches to calculating WACC, with varying degrees of complexity when it comes to accounting for such things as preferred shares and other forms of bond issuances, hedges, and other obligations related to currencies, and the like. The key to the calculations employed here is to achieve a balance between utility and accuracy. To arrive at this balance, I’ve used the most thorough of the recommend calculations (a multi-step process) that can be automated (programmed) for screening purposes. Among the various texts consulted for this part of the screen, I found the following most helpful – providing a discussion of the various approaches, their comparative strengths and weaknesses, and providing the model ultimately selected for the screen:
Copeland, Koller, and Murrin. Valuation: Measuring and Managing the Value of Companies, 3rd Edition.
I understand that the authors have released a more recent edition.
During business school and in my teaching of management, it is often difficult to persuade some students that management is an imprecise undertaking. The presence of equations in financial management, market research, operations research, and, even, HR, suggest the precision and certitude of science, and my executive students, especially, can be uncomfortable with the thought that uncertainty may be unavoidably present or that more than one approach is possible or “approved.” Nevertheless, accounting has changed markedly since the monks of Venice first created double-entry book keeping, no equation guarantees successful branding, no perfected form of customer surveying exists, advances and improvements with OR occur with delightful frequency, and, despite the creation of multivariate equations, no perfect mix of personnel compensation optimizes performance … and there is more than one way to skin the proverbial cat when it comes to financial analysis. The key is to grasp the intent and utility of the effort – in other and more succinct terms, why are we doing this, what can it tell us and with what level of certainty, and are there other methods for securing corroboration? But, in management, uncertainty, imprecision, and the risk of error are unavoidable; otherwise, every economist would be in agreement, Lowes and Home Depot would produce the same quarterly results, competitive advantages would disappear, and we would exist in a boring and unprofitable state of persistent equilibrium – where net profits equal the weighted average cost of capital.
As for WACC, I’ve sought the balance described earlier and sought to use a combination of approved approaches in order to insure its credibility with readers. Professional management is a whole-istic exercise, where decisions and efforts in every aspect of an organization influence the outcome and, more importantly, influence every other aspect (normally defined as “departments”). To provide professionals with the tools necessary to promote (not guarantee) success, management training programs divide management in specialties (HR, Marketing, Advertising, Finance, Accounting, Strategic Management, IT, Operations, etc.). From these specialties, individual classes are offered, and, within those classes, distinct tools and techniques are presented and memorized. This invariably teaches a silo mentality that flies in the face of reality or a whole-istic perspective.
Management programs that recognize this limitation typically seek to bring everything together with a Capstone class at the end of the program – at a time when the student is interviewing for jobs, is mentally burnt out, errantly believes they are now the complete package with little else to learn, and, consequently, the importance of a whole-istic perspective if often lost. And we know this by the frequency with which political in-fighting among executives exists, the common theme of errors made and opportunities missed because leaders do not coordinate and communicate, and, relevant to financial management, the frequency with which firms enter bankruptcy uncertain of its cause and only realizing the direness of the situation just weeks before consulting a bankruptcy attorney.
None of this should suggest that, with financial analysis, opportunities for creativity are entirely absent. I know of no other writer on the subject of financial management who uses process control charting, much less trended process control charts, to measure and graphically depict trended results. That, however, represents a significant advance over the norm, and the practice makes intuitive sense to those who have received an advanced education in management – since the calculated data and the use of statistical process controls are taught separately in business schools.
Additionally, my purpose is to teach a philosophical approach. One that relies on data rather than gestalt, that seeks insight by creating a consistent mental model of a firm and its prospects using a diversity of data sources and non-data information, and suggests a level of investigative rigor designed to make the practice of investing more professional than taking a random walk or hurling a fist full of darts at a distant board.
So, if you have hit on a better or simpler approach, test it along side of the approved or conventional method. Are the results consistently the same? Do they tell you different things – advancing your understanding and knowledge? And, in the arena of business management, can you easily teach it and sell it to your superiors? In this respect, I recommend reading Thomas Kuhn’s “Structure of Scientific Revolutions” and, if you haven’t already read it, Edward Tenner’s “Why Things Bite Back.” The first describes how advances arrive and their life from “Eureka!” to adoption, and the second describes the unsavory impact of false Eureka’s.
Thanks,
Robert
rcrawford
July 16, 2008 at 6:36 am
Gerry,
One final comment on your last question. The risk free rate changes daily, so you’ll need to use something other than a table — unless that table is up-to-date.
Robert
rcrawford
July 16, 2008 at 6:39 am
Robert -
I am still in first grade when it comes to investment school and a lot of my little knowledge comes from trying to understand how you build your spreadsheets and calculate the different values. I feel I slowly get the big picture and know have some more detailled questions. I hope I am not bothering you too much with that.
In that regard I visited your WACC blog again to get a better understanding of your calculations. I realize now that I confused equity with equity. while I had assumed (and therefore my suggestion in my earlier note) that you use the equity found on the balance sheet similar to the debt, but you actually calculate equity as product of shares and share price, correct?
On a different note I have a question regarding your RV calculation. I noticed that in a first step you use the different Graham factors to adjust Assets, with Intangibles not being carried over. But in a following step you subtract the intangibles from those adjusted assets to arrive at adjusted book value. is this correct? it appears to me that by doing so you subtract the intangibles two times.
Regards,
Gerry
Gerry
July 16, 2008 at 7:57 am
Gerry,
I’m happy to have the questions; although, my time to respond will become more constrained starting at the end of this week. I’ll be in Charleston giving a couple of conference talks next week, followed the week after with 10 days work in NYC, and then the semester at UNC starts in earnest.
First, your revised calculation for equity is correct. The intent is to identify the expected returns the firm is effectively obliged to render for the two key forms of financing (debt and equity). On the debt side, you want to account for the tax benefits, and, on the equity side, you want to account for the opportunity costs (the next best use of the investor’s capital). That next best use could, in theory, be another stock, with an equally uncertain return, but, by convention, we use the risk free cost of capital to identify the minimum return reliably available to the investor, plus a risk adjustment for the broader market. Thereafter, some include the specific stock’s beta, as a measure of the stock price’s volatility risk, but I do not (be careful how you calculate this, if electing to do so).
The volatility of the stock is a function of market sentiment over time, and sentiment is a euphemism for psychology. The market’s psychology is as mercurial as the female heroines in a Tennessee Williams play — experiencing long periods of stability, with pent-up angst simmering and barely constrained beneath the surface, followed by bouts of indecipherable weirdness. Think Blanch Dubois — although, Stanley in “Streetcar” would suffice, as well.
The intangibles portion does not “double count” its zero value, but it does appear twice in the event that I want to make an exception in the rare case where doing so would be appropriate. You’ll find something similar to this model in the Greenwald book.
I should note that CROIC, WACC, EPV, and RV are more advanced concepts than simple ratio analysis, and they extend further than the modified ratios related to Owner’s Earnings and the Dupont breakdown for ROA and ROE. You can certainly start with the more advanced materials, but the ratios are the foundation and are more important to cultivating a grasp of a firm and its fiscal health.
CROIC, WACC, EPV, and RV, as used in my models, serve several purposes, but, with one exception, the most important is to determine whether Capital Expenditures deployed toward growth benefit the investor or undermine that investment. This is a fairly narrow point of consideration, since there is nothing wrong with investing in strong and stable firms that are not growing, are highly profitable and increasing shareholders equity or paying attractive dividends, and are attractively priced, with a significant margin of safety.
[Note: The one exception, referenced above, is the use of CROIC to insure the firm has a sufficient buffer to weather typical market declines. The convention is to require a CROIC rate of greater than 13 percent. I use 15 percent.]
Thanks,
Robert
rcrawford
July 16, 2008 at 9:14 pm
Robert -
thanks so much for your educational service. you seem to be of a very rare kind willing to share all of your knowledge and wisdom and explaining every step how you get from A to B.
all the best for your conference and the next semester
Gerry
Gerry
July 17, 2008 at 8:30 pm
[...] These are, of course, in reverse alphabetical order. The description of the column entries can be found in the AEO Board posting at http://rcrawford.wordpress.com/2008/07/13/aeo-board-screening-test-results/. [...]
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