View
310
Download
4
Category
Preview:
Citation preview
0
CONFIDENTIAL � For Education and Training Purposes Only
CFROI® Key Adjustments and Valuation
Framework
Greg Collett
greg.collett@credit-suisse.com
+44 207 88 33 643
Prepared for training purposes. This document has been prepared for your information and use only. It should only be distributed to other members of your organization on a need-to-know basis and is not meant for distribution or dissemination to any other person or entity.
CONFIDENTIAL � For Education and Training Purposes Only
1
HOLT CFROI® Overview
1. Performance Measurement
CFROI® allows comparison of performance across time and
borders. To do this we need to:
! Capture all off balance sheet assets such as operating leases.
! Account for intangible assets (normally classified as Goodwill).
! Capitalise Research and Development.
! Inflation adjust the assets to current dollars.
2. Valuation
Key advantages of the HOLT DCF Model
Quantify Market expectations � what returns and growth are priced in.
Warranted Price � �what�s it worth� using system derived returns and growth.
Sensitivity Analysis � what happens if...
CONFIDENTIAL � For Education and Training Purposes Only
2
Linking Corporate Performance To Valuation
AccountingData
AccountingData Share PriceShare PriceCFROI®CFROI®
Cash FlowIncome Statement CFROI®
Asset GrowthBalance Sheet Cash InvestmentEPS, ROE, ROCE Asset Life Life Cycle - Fade
Discount Rate
CONFIDENTIAL � For Education and Training Purposes Only
3
From Accounting To Cash
Net Income+/- Special Items (after tax)+ Depreciation/Amortization Expense+ Interest Expense+ R&D Expense+ Rental Expense+ Minority Interest Expense+ Net Pension Cash Flow Adjustment+ LIFO charge to FIFO Inventory+ Monetary Holding Gain/Loss- Equity Method Investment Income
£10
Cash InCash InInflation AdjustedGross Cash FlowNet Income
Book Assets =10%Net Book Assets+ Accumulated Depreciation+ Inflation Adjustment to Gross Plant+ LIFO Inventory Reserve+ Capitalized Operating Leases+ Capitalized R&D- Equity Method Investments- Goodwill- Non-Debt Monetary Liabilities & Def. Taxes
Inflation AdjustedGross Investment
Cash OutCash Out£100
CONFIDENTIAL � For Education and Training Purposes Only
4
From Cash To CFROI® (Internal Rate of Return)
Net Monetary Assets+ Inflation Adjusted Land & Improvements+ Investments (Non-Equity Method )+ Inventory (w/ LIFO Inventory Reserve)+ Other LT Assets less Pension Assets
Net Income (Before Extraordinary Items)+/- Special Items (after tax)+ Depreciation/Amortization Expense+ Interest Expense+ R&D Expense+ Rental Expense+ Minority Interest Expense+ Net Pension Cash Flow Adjustment+ LIFO charge to FIFO Inventory+ Monetary Holding Gain/Loss- Equity Method Investment Income
£100Inflation AdjustedGross Investment
13-Year Asset Life
£10
£25
Gross Cash Flow
CFROI® = 6.0%CFROI® = 6.0%
Non-Depreciating Assets
Net Book Assets+ Accumulated Depreciation+ Inflation Adjustment to Gross Plant+ LIFO Inventory Reserve+ Capitalized Operating Leases+ Capitalized R&D- Equity Method Investments- Pension Assets- Goodwill- Non-Debt Monetary Liabilities & Deferred Taxes
CONFIDENTIAL � For Education and Training Purposes Only
5
Inflation Adjustment of PPE � Why do it?
Cash Flow
$10,000
Gross PPE
$100,000
Income Statement increases due to inflation over 10
years
Cash Flow
$14,382
Inflation Adjustment
$50,000
$50,000
CFROI = 5.6%
ROIC = 10,000/50,000 = 20%
Asset Life = 15 Years
CFROI = 5.6%
$43,856
Capex = Depreciation
Net PPE
Accumulated Depreciation
$50,000
$50,000
ROIC = 14,382/50,000 = 28,8%
Net PPE
Acc Depreciation
CONFIDENTIAL � For Education and Training Purposes Only
6
Inflation Adjustment of PPE � How we do it.
Gross Plant Inflation Adjustment Calculator
Input OutputAdjusted Gross Plant (As per AFS) 100,000 Historical Value Adjusted Gross Plant 100,000Estimated Project Life 15 Gross Plant Inflation Adjustment % 44%Historic Real Asset Growth 0.00% Infaltion Adjustment to Gross Plant 43,856Starting Year 2007 Inflation-adjusted Gross Plant 143,856
Select Currency: 1
This calculator is illustrative and for Internal Use Only.
United States Dollars
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
2007
2005
2003
2001
1999
1997
1995
1993
Years
Inflation Adjustment
Current Value of Project Layers
CONFIDENTIAL � For Education and Training Purposes Only
7
Operating Leases � Why capitalise leases?
0
50
100
150
200
250
300
MRW TSCO DELB GENC CASP CARR COLR SBRY JMT AHLN MEOG KESBV AXFO0
5
10
15
20
25
30
35
40
Cap Lease/Net Assets CFROI (RHS) RONA (RHS)
European Retail Sector
The vast differences in leasing policies between these companies makes comparisons all but impossible.
CONFIDENTIAL � For Education and Training Purposes Only
8
Operating Leases � How do we capitalise leases?
Rental Expense:
Asset Life:
Real Debt Rate:
Gross Capitalised Lease Value:
72.29
8.71
2.3
581.82
Capitalised Lease = PV (Real Debt Rate, Life, Expense, Future Value (0))
Axfood AB (2007) Source: Credit Suisse HOLT
CONFIDENTIAL � For Education and Training Purposes Only
9
R&D Capitalisation � Why do it?
!R&D is an expenditure similar to Capex
! It is a long term investment from which companies expect future cash flows.
!R&D Conversion to cash flow varies across companies and industries
! It aids comparability.
ASTRAZENECA PLC (AZN)
CONFIDENTIAL � For Education and Training Purposes Only
10
R&D Capitalisation � How we do it?
Year 2003 2004 2005 2006 2007R&D Expediture 100 105 110 116 122
100 105 110 116100 105 110
100 105100
Total Capitalised R&D 553
Inflation 5% 5% 5% 5% 5%
$553 is added to the balance sheet and the expense ($100) is added back to net income.
CONFIDENTIAL � For Education and Training Purposes Only
11
HOLT�s CFROI® Valuation Model
Key Features
! Valuations are done as of today � good comparison to current price
! Mean Reversion beyond the forecast period
! Returns (CFROIs) fade to 6%
! Asset growth fades to 2.5% real
! Discount rate fades to 6%
Over time, competition will erode excess returns and growth rates to cost of capital and GDP levels respectively.
Benefits
! Reflects economic reality
! Allows estimation of the competitive advantage period
CONFIDENTIAL � For Education and Training Purposes Only
12
Industrial Life Cycle
Increasing CFROIs & High Reinvestment
Above-Averagebut Fading CFROIs
Below-AverageCFROIs
AverageCFROIs
CFROIsDiscount Rate
(Investors� RequiredRate of Return)
Growth Fading Mature Turnaround?
ReinvestmentRates
CONFIDENTIAL � For Education and Training Purposes Only
13
CFROI® and Asset Growth Benchmarks
0
2
4
6
8
10
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
0
2
4
6
8
10
1950
1952
1954
1956
1958
1960
1962
1964
1966
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
CFROI
Real Asset Growth Rate
6.0% Average
2.5% Average
%
%
U.S. Industrial/Service Firms
2005e
2005eConclusion: Companies earn a reasonably stable 6+% after tax, after inflation
CFROI® and grow their assets at a 2.5+% real rate annually.
CONFIDENTIAL � For Education and Training Purposes Only
14
CFROI Model is Mean Reverting
In Fade period, long term fade targets are used to calculate CFROI and Growth.
0
5
10
15
20
25
30
35
1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 100
CFROI = 6%Discount Rate = 6%
RAGR = 2.5%
CFROI RAGR Discount Rate
CONFIDENTIAL � For Education and Training Purposes Only
15
HOLT Pricing Puzzle
Operational
Drivers
Financial
DriversValue Drivers Cash Flows
WarrantedValue =
Gross Cash Flow
Ch Investment
Net Cash Receipts
1 + DR
less
Asset
Growth
Assets
CFROI®
Sales
Growth
Turns
MarginsSG&A
COGS
PPE
Payables
Receivables
Inventory
Price Realization
Volume
Fade
CONFIDENTIAL � For Education and Training Purposes Only
16
The CFROI Model has three stages
6 7 8 9 10 95 96 97 98 99 100
t
0200400600800
100012001400
1 2 3 4 5
PV o
f NC
R
101
102
103
104
105
106
107
108
ST Fade LT Fade Wind Down
Exponential Fade (10%) and LT Fade
Targets derive CFROI and Growth
NDA Release + GCF on assets not yet
retired
CONFIDENTIAL � For Education and Training Purposes Only
17
Calculation of Net Cash Receipts
! The forecasted stream of Net Cash Receipts is what we discount to determine the Total Economic Value of the firm.
Outflows -New
Investments
Gross Cash Flow
Increase in Net Working
Capital
GrowthCapex
NCR
AssetBase
XEconomicReturns
AssetBase
X
ValueThis!
Outflows -New
Investments
Gross Cash Flow
Increase in Net Working
Capital
GrowthCapex
Firm�s Net Cash Receipts
NCR
Maintenance Capex
AssetBase
XEconomicReturns
AssetBase
XGrowth
ValueThis!
Retirement
CONFIDENTIAL � For Education and Training Purposes Only
18
Calculating NCR using CFROI and Growth
Gross Cash Flow
Investment
less
Reinvestment
Assets
CFROI®
Fade How do we calculate these?
NOPAT
Ch Investment
Net Cash Receipts FCFWarranted
Value =1 + Discount Rate WACC
CONFIDENTIAL � For Education and Training Purposes Only
19
Calculating Gross Cash Flow
Gross Cash Flow is the payment (pmt) needed to earn the CFROI (rate) given the
Gross Investment (pv), Non-Depreciating Assets (fv), and Life (nper).
Total Investment
CFROI is a user input in forecast and function of Fade logic beyond that
Gross Investment is grown at real asset growth rate
NCR
NDA% is held constant in ST and LT Fade period
Life is held constant is ST and LT fade period
NDANDA
Gross Cash Flow
CFROICFROI
LifeLife
Gross Investment
Gross Investment Total
Investment
RATERATE
NN
PVPV
FVFV
PMT(GCF)
PMT(GCF)
CONFIDENTIAL � For Education and Training Purposes Only
20
Gross Cash Flow Calculation
Year CFROIReal Asset
GrowthProject
ROIGross
Investment NDAGross
Cash Flow0 100,000 20,0001 12.00% 7.00% 14.02% 107,000 21,400 23,3882 11.17% 6.50% 13.01% 113,955 22,791 24,2003 10.34% 6.00% 12.00% 120,792 24,158 24,9074 9.51% 5.50% 11.00% 127,436 25,487 25,4965 8.68% 5.00% 10.00% 133,808 26,762 25,9576 8.36% 4.75% 9.60% 140,164 28,033 26,8607 8.06% 4.53% 9.24% 146,506 29,301 27,7668 7.80% 4.32% 8.92% 152,839 30,568 28,6749 7.56% 4.14% 8.62% 159,167 31,833 29,588
10 7.35% 3.98% 8.36% 165,495 33,099 30,509
99 5.40% 2.50% 6.00% 1,498,597 299,719 255,408100 5.40% 2.50% 6.00% 1,536,064 307,213 261,793
Assumes Life of 6 years.
CFROICFROI
LifeLife
Gross Investment
Gross Investment
NDANDA
Short Term Fade
Long Term Fade
CONFIDENTIAL � For Education and Training Purposes Only
21
Calculating NCR using CFROI and Growth
WarrantedValue
=
Gross Cash Flow
Investment
Net Cash Receipts
1 + Discount Rate
less
Reinvestment
Assets
CFROI®
Now you know where this comes from!
Fade
How do we calculate this?
CONFIDENTIAL � For Education and Training Purposes Only
22
Investment Calculation
Total InvestmentGross
Cash Flow
NCR
Retirement = Replacement of Depreciating Assets from life years ago. This can be thought of as maintenance Capex.
Note: NDA has an infinite life and therefore does not retire
Gross Cash Flow
PMT(GCF)
Total Investment
Retirement
Growth
INV
Growth = ∆ Gross Investment. This can be thought of as growth Capex.
Therefore: INV = Growth Capex + Maint. Capex
CONFIDENTIAL � For Education and Training Purposes Only
23
What are Retirements?10
10%
CAPEX Inflation Retire-ments
Total Investment
1 100 5%2 110 5%3 121 5%4 133 5%5 146 5%6 161 5%7 177 5%8 195 5%9 214 5%10 236 5%11 259 5% 163 42212 285 5% 179 46413 314 5% 197 51114 345 5% 217 56215 380 5% 238 61816 418 5% 262 68017 459 5% 289 74818 505 5% 317 82319 556 5% 349 90520 612 5% 384 996
4,134 2,596 6,73061% 39% 100%
Project Life
GrowthBusiness starts from scratch and grows at 10% for 20 years. The assumption here is that CAPEX buys depreciating assets, as opposed to working capital.
How can the 100 you spent ten years ago represent the replacement cost today?
HOLT delayers the Inflation Adjusted Gross Plant which takes care of this problem.
This simple example has been created to illustrate the principle of retirements in a 5% inflation environment.
In year 11, the first layer of CAPEX has to be retired (scrapped) and replaced. This is in addition to the 10% growth in the business. Cash requirement is thus 422.
CONFIDENTIAL � For Education and Training Purposes Only
24
Calculating NCR using CFROI and Growth
YearReal Asset
GrowthGross
InvestmentDepr.
Assets NDA RetirementDA
GrowthOutflowfor DA
Outflowfor NDA
Total Investment
10,00011,14312,41713,83715,419
0 100,000 80,000 20,000 17,1821 7.00% 107,000 85,600 21,400 10,000 5,600 15,600 1,400 17,0002 6.50% 113,955 91,164 22,791 11,143 5,564 16,707 1,391 18,0983 6.00% 120,792 96,634 24,158 12,417 5,470 17,887 1,367 19,2554 5.50% 127,436 101,949 25,487 13,837 5,315 19,152 1,329 20,4815 5.00% 133,808 107,046 26,762 15,419 5,097 20,517 1,274 21,7916 4.75% 140,164 112,131 28,033 17,182 5,085 22,267 1,271 23,5387 4.53% 146,506 117,205 29,301 15,600 5,074 20,674 1,268 21,9428 4.32% 152,839 122,271 30,568 16,707 5,066 21,774 1,267 23,0409 4.14% 159,167 127,333 31,833 17,887 5,062 22,950 1,266 24,215
Given our life of 6 years and Historic Growth Rate of 11.14%, we construct a stream of outflows that sum up to our current level of Depreciating Assets
Assumes 11.14% Historic Growth and life of 6 years. Then, in each year of the fade, we look back 6 years to determine the retirement for the current year.
∑Short Term Fade
Long Term Fade
CONFIDENTIAL � For Education and Training Purposes Only
25
Calculating NCR using CFROI and Growth
YearGross
Cash Flow -Total
Investment = NCR
01 23,388 17,000 6,3882 24,200 18,098 6,1023 24,907 19,255 5,6524 25,496 20,481 5,0155 25,957 21,791 4,1666 26,860 23,538 3,3227 27,766 21,942 5,8238 28,674 23,040 5,6349 29,588 24,215 5,373
10 30,509 25,481 5,028
99 255,408 219,697 35,711100 261,793 225,710 36,084
Short Term Fade
Long Term Fade
26
CONFIDENTIAL � For Education and Training Purposes Only
The HOLT Value-to-Cost Ratio as a Discounted Cash Flow Metric
David Hollanddavid.a.holland@credit-suisse.com
Michael Valentinasmichael.valentinas@credit-suisse.com
Prepared for [client]. This document has been prepared for your information and use only. It should only be distributed to other members of your organization on a need-to-know basis and is not meant for distribution or dissemination to any other person or entity.
CONFIDENTIAL � For Education and Training Purposes Only
27
What is the HOLT Value-to-Cost Ratio?
It is a measure of a firm�s enterprise value divided by its inflation-adjusted net asset value. It is analogous to the Price-to-Book Ratio (PBR) and similar to Tobin�s Q ratio, which is an economic measure of market value of assets divided by their replacement cost.
AssetsNetAdjustedInflationValueEnterpriseRatioCosttoValue
ValueBookEquityCapMarketEquityRatioBooktoPrice
=
=
CONFIDENTIAL � For Education and Training Purposes Only
28
How Does VCR Differ From PBR?
� VCR uses Enterprise Value rather than Equity Value� Better reflects the true economic cost of the asset base
� VCR inflation-adjusts the asset base.
� Allows for better global comparisons.
� Capitalizes operating leases and R&D
PBR is consistent with a Dividend Discount Model or Equity Free Cash Flow valuation framework.
VCR is consistent with the HOLT Cash Value Added (CVA) valuationframework.
CONFIDENTIAL � For Education and Training Purposes Only
29
What Is the HOLT Cash Value Added?Illustrative ExampleAssume a company earns Gross Cash Flow of $2,610 during the year. IAGI is $10,000 and NDA are $2,500. The required rate of return is 6% and the assets have a 6 year life. Using the PMT Excel function or formula in the appendix, the calculated capital charge is $1,675. The remaining $935 represents the CVA or Economic Profit generated by the company.
CVA Charge
CFROI rate rate WACC18.2% 6.0%
Life nper nper Life6.0 6.0
2,610 1,675IAGI pv pv IAGI
10,000 10,000CVA
NDA fv 935 fv NDA2,500 2,500
-=
Economic Profit
GCF
Note: when performing valuations, CVA should be based on the beginning of year asset base.
CONFIDENTIAL � For Education and Training Purposes Only
30
The HOLT Prizing Puzzle Using CVA
The HOLT CVA Valuation Model measures attributes of the business:
! Economic Value of Net Assets! Value of Excess Return on those Assets! Value of Growth
( )∑∞
= ++=
1nn
n0 WACC1
CVAIANAValue
Growth
Excess Return
Net Assets
crea
tes
CONFIDENTIAL � For Education and Training Purposes Only
31
The Relationship Between VCR and DCF ValuationThe Enterprise Value is the present value of all future Net Cash Receipts (NCR). This value is equivalent to the economic net asset value (IANA) plus the present value of all future economic profit streams (CVA). The VCR can be related to future economic profits where WACC is the weighted average cost of capital.
( )
( )
( )∑
∑
∑
∞
=
∞
=
∞
=
+×⎟⎟⎠
⎞⎜⎜⎝
⎛+=
++=
+=
1nn
n
0
1nn
n0
1nn
n
WACC1CVA
IANA11VCR
WACC1CVAIANAValueEnterprise
WACC1NCRValueEnterprise
Wealth Creation Term
CONFIDENTIAL � For Education and Training Purposes Only
32
VCR and the Components of Value Creation
Assume a business is growing at 7.5% percent. The chart below depicts the three attributes of the CVA valuation framework given various Excess Return profiles. The middle band represents the value due to an excess return and the top band represents the value due to growth. Growing a business that operates at its cost of capital creates no wealth.
Net Assets
Excess Return
Growth
0.0
0.5
1.0
1.5
2.0
2.5
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
Excess Return
VCR Growth
Excess ReturnCost
CONFIDENTIAL � For Education and Training Purposes Only
33
�Cash Counts�
Value-to-Cost Spread (HOLT)R2 = 0.733
0
1
2
3
4
5
6
7
8
9
10
-10 -5 0 5 10 15 20 25 30 35 40
CFROI - DR
Valu
e/C
ost
US, Market cap > 10bn, 2005
CONFIDENTIAL � For Education and Training Purposes Only
34
Source: HOLT, 25 Sep 2005Note: Value-Cost Ratio is Enterprise Value divided by Inflation Adjusted Net Assets
CIBN
NZYMb
BOC
AKZO
AIRP
SOLBt
CLN
LONN
GIVN
BAYG
LING
ICI
YAR
DSMN
BASFSYNN
0.5
0.7
0.9
1.1
1.3
1.5
1.7
1.9
2.1
2.3
0% 2% 4% 6% 8% 10% 12% 14% 16%
Value-Cost Ratio (VCR) vs CFROI
Interesting Longs
Interesting Shorts
Valu
e-C
ost R
atio
CFROI® Used In Valuation
BUY
SELL
CONFIDENTIAL � For Education and Training Purposes Only
35
Expectations Analysis
CFROI Benchmarking (Mkt Implied vs 5 Year Range)
0%
2%
4%
6%
8%
10%
12%Sy
ngen
ta
Akz
o N
obel
Giv
auda
n
DSM
Lonz
a G
roup
Cla
riant
BA
SF
Bay
er
Yara
Intl
Air
Liqu
ide
Lind
e
Solv
ay S
ocie
te
ICI
Nov
ozym
es
CIB
A S
peci
alty
BO
C G
roup
CFR
OI®
Less AttractiveMore Attractive
Source: HOLT Sector Specialist analysis, 19 Sept 2005
Last 5 Year CFROI® Range
Market Implied CFROI® FY5
CONFIDENTIAL � For Education and Training Purposes Only
36
Global Industry VCRs: Top and Bottom of the ClassThe top and bottom aggregate Global Industry VCRs are plotted below. Household & Personal Products is trading at a lofty 3.7, indicating that fade is not anticipated. Utilities trade at 0.98 indicating that they are priced at their economic book value.
Industry Value/Cost Ratios
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
1988 1990 1992 1994 1996 1998 2000 2002 2004
Household & Personal Products
Utilities
Software & Services
Automobiles & Components
Source: CSFB HOLT World AggreGator October 2004
CONFIDENTIAL � For Education and Training Purposes Only
37
Regional VCRs: Historical Trends and LevelsRegional VCRs are plotted below. North America is trading at a lofty 1.9 indicating that impressive value creation is expected to continue. Note how most regions traded at their economic book values in 1990. Are wealth creation expectations running too high?
Regional Value/Cost Ratios
0.0
0.5
1.0
1.5
2.0
2.5
1988 1990 1992 1994 1996 1998 2000 2002 2004
Europe NJA
North America ROW
World
Source: CSFB HOLT World AggreGator October 2004
38
CONFIDENTIAL � For Education and Training Purposes Only
HOLT�s Economic P/E
David Hollanddavid.a.holland@credit-suisse.com
Greg Collettgreg.collett@credit-suisse.com
Prepared for [client]. This document has been prepared for your information and use only. It should only be distributed to other members of your organization on a need-to-know basis and is not meant for distribution or dissemination to any other person or entity.
CONFIDENTIAL � For Education and Training Purposes Only
39
What is the Economic P/E?
! The Value to Cost Ratio indicates the market�s expectation of cash flows per dollar of replacement cost of assets.
! Positive spread industries command VCRs greater than 1.
! Cost of capital industries have a VCR of 1. i.e. EV = Replacement Cost.
! The fact that one VCR is greater than another does not make it superior.
! Dividing VCR by CFROI normalises the VCR and converts it to an Economic PE ratio.
CONFIDENTIAL � For Education and Training Purposes Only
40
What is the Economic P/E?
VCR Economic PE =
CFROI
EV
IANA Economic PE =
GCF � Ecn Dep
IANA
IANA cancels out
EV PriceEconomic PE =
GCF � Ecn Dep Earnings
IANA = Inflation Adjusted Net Assets or Replacement Cost
EV = Market Cap plus Debt
CONFIDENTIAL � For Education and Training Purposes Only
41
World 1800: All CompaniesAg g r e g a te M u lt ip le An a lys isD a ta D a te : 1 5 - A u g - 2 0 0 7
A g g re g a te A n n u a l V a lu e C o s t R a tio s
0 .0
0 .5
1 .0
1 .5
2 .0
2 .5
1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7
Valu
e C
ost R
atio
0 .0 %
1 .0 %
2 .0 %
3 .0 %
4 .0 %
5 .0 %
6 .0 %
7 .0 %
8 .0 %
9 .0 %
1 0 .0 %
CFR
OI (
%)
C F R O Is H is to r ic V C R s E s t. V C R (b a s e d o n A g g re G a to r s he e t)
A g g re g a te E c o n o m ic P E
0
5
1 0
1 5
2 0
2 5
3 0
3 5
1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7
P o rtfo lio : W o rld 1 8 0 0 Ind e x - M S C I (G IC ); L e ve l: A ll; R e g io n : G lo b a l S o u rc e : H O L T A g g re G a to r�
High CFROI should produce high VCRs due to increased EV, however, in this case, VCR has not kept up with the increase in CFROI with a resulting decline in Economic PE ratio.
Economic PE decreases when the VCR ratio increases slower than CFROI.
CONFIDENTIAL � For Education and Training Purposes Only
42
World 1800: Capital GoodsAg g r e g a te M u lt ip le An a lys isD a ta D a te : 1 5 - A u g - 2 0 0 7
A g g re g a te A n n u a l V a lu e C o s t R a tio s
0 .0
0 .5
1 .0
1 .5
2 .0
2 .5
1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7
Valu
e C
ost R
atio
0 .0 %
2 .0 %
4 .0 %
6 .0 %
8 .0 %
1 0 .0 %
1 2 .0 %
CFR
OI (
%)
C F R O Is H is to r i c V C R s E s t. V C R (b a s e d o n A g g re G a to r s he e t)
A g g re g a te E c o n o m ic P E
0
5
1 0
1 5
2 0
2 5
3 0
3 5
1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7
P o rtfo lio : W o rld 1 8 0 0 Ind e x - M S C I (G IC ); L e ve l: C a p i ta l G o o d s ; R e g io n : G lo b a l S o u rc e : H O L T A g g re G a to r�
VCRs have increased over the last 5 years, indicating that the market is expecting greater NCRs for every dollar cost of replacement assets. In isolation, this looks like higher expectations.
However, CFROIs have also increased and since these means NCRs will be higher, maybe VCRs have not kept pace with CFROI increase.
This is in fact so. Economic PE has declined.
CONFIDENTIAL � For Education and Training Purposes Only
43
Disclosure and Notice
References to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please follow the attached link: http://www.creditsuisse.com/en/who_we_are/ourstructure.htmlThis material has been prepared by individual sales and/or trading personnel of Credit Suisse Securities (Europe) Limited or its subsidiaries or affiliates (collectively "Credit Suisse") and not by Credit Suisse's research department. It is not investment research or a research recommendation for the purposes of FSA rules as it does not constitute substantive research or analysis. All Credit Suisse research recommendations can be accessed through the following hyperlink: https://s.research-and-analytics.csfb.com/login.asp subject to the use of a suitable login. This material is provided for information purposes, is intended for your use only and does not constitute an invitation or offer to subscribe for or purchase any of the products or services mentioned. The information provided is not intended to provide a sufficient basis on which to make an investment decision. It is intended only to provide observations and views of the said individual sales and/or trading personnel, which may be different from, or inconsistent with, the observations and views of Credit Suisse analysts or other Credit Suisse sales and/or trading personnel, or the proprietary positions of Credit Suisse. Observations and views of the salesperson or trader may change at any time without notice. Information and opinions presented in this material have been obtained orderived from sources believed by Credit Suisse to be reliable, but Credit Suisse makes no representation as to their accuracy or completeness. Credit Suisse accepts no liability for loss arising from the use of this material.. This material is not for distribution to retail clients and is directed exclusively at Credit Suisse's market professional and institutional clients. Moreover, any investment or service to which this material may relate, will not be made available by Credit Suisse to such retail customers. All valuations are subject to Credit Suisse valuation terms. Information provided on trades executed with Credit Suisse will not constitute an official confirmation of the trade details. FOR IMPORTANT DISCLOSURES on companies covered in Credit Suisse Investment Banking Division research reports, please see www.credit-suisse.com/researchdisclosures.Backtested, hypothetical or simulated performance results have inherent limitations. Simulated results are achieved by the retroactive application of a backtested model itself designed with the benefit of hindsight. The backtesting of performance differs from the actual account performance because the investment strategy may be adjusted at any time, for any reason and can continue to be changed until desired or better performance results are achieved. Alternative modeling techniques or assumptions might produce significantly different results and prove to be more appropriate. Past hypothetical backtest results are neither an indicator nor a guarantee of future returns. Actual results will vary from the analysis.With respect to the analysis in this report based on the HOLT� methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the HOLT methodology and (2) no part of the Firm�s compensation was, is, or will be directly related to the specific views disclosed in this report. The HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default variables and incorporated into the algorithms available in the HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. These adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishesthe baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur. The HOLT methodology does not assign a price target to a security. The default scenario that is produced by the HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variables may also be adjusted to produce alternative warranted prices, any of which could occur. Additional information about the HOLT methodology is available on request.Credit Suisse Securities (Europe) Limited is authorised and regulated by the Financial Services Authority.CFROI®, CFROE, HOLT, HOLTfolio, HOLTSelect, HS60, HS40, ValueSearch, AggreGator, Signal Flag and �Powered by HOLT� are trademarks or registered trademarks of Credit Suisse or its affiliates in the United States and other countries.HOLT is a corporate performance and valuation advisory service of Credit Suisse© 2008 Credit Suisse and its subsidiaries and affiliates. All rights reservedJanuary 29 2008
CONFIDENTIAL � For Education and Training Purposes Only
44
World 1800: Durables and ApparelAg g r e g a te M u lt ip le An a lys isD a ta D a te : 1 5 - A u g - 2 0 0 7
A g g re g a te A n n u a l V a lu e C o s t R a tio s
0 .0
0 .2
0 .4
0 .6
0 .8
1 .0
1 .2
1 .4
1 .6
1 .8
1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7
Valu
e C
ost R
atio
0 .0 %
1 .0 %
2 .0 %
3 .0 %
4 .0 %
5 .0 %
6 .0 %
7 .0 %
8 .0 %
CFR
OI (
%)
C F R O Is H is to r i c V C R s E s t. V C R (b a s e d o n A g g re G a to r s he e t)
A g g re g a te E c o n o m ic P E
0
5
1 0
1 5
2 0
2 5
3 0
3 5
1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 0 0 1 2 0 0 3 2 0 0 5 2 0 0 7
P o rtfo lio : W o rld 1 8 0 0 Ind e x - M S C I (G IC ); L e ve l: C o ns um e r D ura b le s & A p p a re l; R e g io n : G lo b a l S o u rc e : H O L T A g g re G a to r�
Parallel movement in CFROI and VCR leads to flat Economic PE performance
Recommended