Embed Size (px)
Citation preview
1
Quest™ : UK themes update – operation style twistNovember 2011
Nigel Sedgley+44 (0)20 7523 [email protected]
Quest™ helpline+44 (0)20 7523 [email protected]
2
Quest™ framework and tools
M&A
LBO valuation
LBO Superscreen
Quest™ market-to-book (replacement cost of assets)
Deal Watch and analysis
Stocks & Products
Companies in the News
triAngle Escalator
Newsletter
Performance
Style matrix
Quest™ themes
Screening
Screen for stocks
triAngle
Wealth creation
Cash flow returns
Capital deployment
Growth
Value tools
Quest™ valuation
Quest™ market-to-book
LBO FCF yield
triAngle Value (Quest™ + conventional)
Risk management tools
Quest™ Risk Rater
Aggressive/Defensive Indicator
Quest™ triAngle
Momentum
3
2008-2009 all over again?
Operation style twist
The run to safe stocks over the summer was more extreme than in 07/08
Value has seen its longest stretch of UK weakness
How much bad news is priced in?
Value approach in Nov 08 Quest Newsletter delivered strong performance
Value started working before the trough in 08/09
Which Value tools to use? (Stable measures)
Stock screens to find value opportunities and overextended (expensive) situations
4
Factors and triAngle composition
Quest™ valuation
Quest™ market-to-book
EV/sales rel. LRA
Dividend yield rel. LRA
P/E rel. LRA
CFROC spread
Capital growth
Equilibrium growth
Fixed charge cover
CFROC change
9m-relative trend
100/200-day switch
12m-relative range
30/90 day switch
Earnings momentum
triAngleValue Quality
Momentum
33% 33%
33%
Quest triAngle
Excellent 12- year track record
3-pronged approach improves consistency
UK Large – 41/51 +ve quarters, +4.3% average
Pan-Euro – 35/46 +ve quarters, +3.1% average
■ Value, Quality and Momentum ‘ baskets’ are dynamic – driven by current rankings
100
1000
10000
No
v-9
8
Au
g-9
9
Ma
y-0
0
Fe
b-0
1
No
v-0
1
Au
g-0
2
Ma
y-0
3
Fe
b-0
4
No
v-0
4
Au
g-0
5
Ma
y-0
6
Fe
b-0
7
No
v-0
7
Au
g-0
8
Ma
y-0
9
Fe
b-1
0
No
v-1
0
Au
g-1
1
triAngle™
Value
Quality
Momentum
UK large caps
5
2008 all over again? ■ 11 years of live triAngle history
■ Value works in short sharp burst – normally when valuation dispersion is high.
■ During the credit crunch, and now ….Quality and Momentum are the main drivers
Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
6
-15% -10% -5% 0% 5% 10% 15%
triAngle
Value
Quality
Momentum
Quest™ Valn
Quest™ Mkt to Book
EV/Sales rel LRA
Div Yield rel LRA
PE Rel LRA
CFROC Spread*
Capital Growth
Equilibrium growth
Fixed charge Cover
CFROC change
9m relative trend
100/200 day switch
12m relative range
ST Indicator
EPS momentum 3m
Latest Quarter – UK May-Aug 2011: An extreme quarter I
8 negative quarters in a row
2nd best in a decade
3rd best in a decade
2nd best in a decade
best for over 3 years
Yield holding up
UK Large
7
triAngle
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
0
500
1000
1500
2000
2500
3000
3500
4000
triAngle FTSE350
Three months ending at date show n
Earnings Momentum
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
0
500
1000
1500
2000
2500
3000
3500
4000
EPS momentum 3m FTSE350
Three months ending at date show n
Value
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
0
500
1000
1500
2000
2500
3000
3500
4000
Value FTSE350
Three months ending at date show n
Quality
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
0
500
1000
1500
2000
2500
3000
3500
4000
Quality FTSE350
Three months ending at date show n
Fixed Charge Cover
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
0
500
1000
1500
2000
2500
3000
3500
4000
Fixed charge Cover* FTSE350
Three months ending at date show n*Live triAngle factor since Feb 04. Previously Ex post backtest. 3m to Feb 04 N/A.
CFROC Spread
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Aug 99
Feb 00
Aug 00
Feb 01
Aug 01
Feb 02
Aug 02
Feb 03
Aug 03
Feb 04
Aug 04
Feb 05
Aug 05
Feb 06
Aug 06
Feb 07
Aug 07
Feb 08
Aug 08
Feb 09
Aug 09
Feb 10
Aug 10
Feb 11
Aug 11
0
500
1000
1500
2000
2500
3000
3500
4000
CFROC Spread* FTSE350
Three months ending at date show n*Pre Feb 04 Avg over 5 historic yrs. Post Feb 04 Avg over 4 Historic, 1 Forecast yr.
triAngle historic context – UK May-Aug 2011: An extreme quarter II
Best for 3 yrs
3rd Best in a decade
8 neg quarters in a row
In Europe: Value, 2nd worst everFixed charge cover, best since 2003
Quality 2nd best everEarnings Momentum: best for 3 yrs
8 out of 9positive
quarters
2nd best in a decade
8
70
80
90
100
110
Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
90
100
110
120
130
140
150
160
Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11
Q-files performance also highlight the exponential shift to quality
High Q-score companies outperforming
Volatile companies underperforming
Quest™ Risk Rater
Aggressive defensive indicator
UK large caps (to 3 Nov)
Aggressive Defensive indicator
■ Identifies the most/ least cyclical and volatile companies
■ Based on three measures: EBITDA stabilityCFROA stabilityShare price volatility
■ Measured over 12 years (including forecasts)
■ High deciles (10) indicate defensive, more stable stock
9
Earnings yield rel. to trailing 10 yr avg
0.0
1.0
2.0
3.0
4.0
May
-01
Nov
-01
May
-02
Nov
-02
May
-03
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
Upper qtlMedianLower qtl
Equities Cheap
Equities Expensive
But how much is now priced in?….. market valuation charts ■ Markets as cheap as Oct 2008-May 2009
■ Corporate action, policy response less likely to be as helpful this time, but less solvency risk.
Prices as at 31 October 2011
Quest default valuation
-75%
-50%
-25%
0%
25%
50%
75%
Mar-
09
May-
09
Jul-09
Sep
-09
Nov-
09
Jan-1
0
Mar-
10
May-
10
Jul-10
Sep
-10
Nov-
10
Jan-1
1
Mar-
11
May-
11
Jul-11
Sep
-11
Upper qtlMedianLower qtl
Equities Expensive
Equities Cheap
Quest Mkt-to-book (ex goodwill)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
May
-01
Nov
-01
May
-02
Nov
-02
May
-03
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
Upper qtlMedianLower qtl
Equities Expensive
Equities Cheap
EV/Sales rel. to trailing 10yr avg
0.00
0.50
1.00
1.50
2.00
May-
01
Nov-
01
May-
02
Nov-
02
May-
03
Nov-
03
May-
04
Nov-
04
May-
05
Nov-
05
May-
06
Nov-
06
May-
07
Nov-
07
May-
08
Nov-
08
May-
09
Nov-
09
May-
10
Nov-
10
May-
11
Upper qtlMedianLower qtl
Equities Expensive
Equities Cheap
10
-40% -30% -20% -10% 0% 10% 20% 30%
triAngle
Value
Quality
Momentum
Quest™ Valn
Quest™ Mkt to Book
EV/Sales rel LRA
Div Yield rel LRA
PE Rel LRA
CFROC Spread*
Capital Growth
Equilibrium growth
Fixed charge Cover
CFROC change
9m relative trend
100/200 day switch
12m relative range
ST Indicator
EPS momentum 3m
UK end Nov 08-end Feb 09: Value rallied before the market
More stable value measures leading the way
Fixed charge cover: Feb-May 2009 -13%, May-Aug 2009 -7%
A sign of rotation
Quality held up
11
Style matrix – what’s working now – Value spike in October
Data to 28th October 2011Source: Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
12
The troughV,Q neutral,Mmtm -ve
Crisis developingValue –ve, Qual +ve,
Mmtm +ve
History rhymes – where are we now?UK Large
Now(2010-2012?)
to 11 Nov 2011
Then(2007-2009)
Market rallyingValue +ve, Qual neutral,
Mmtm -ve
Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
60
70
80
90
100
110
120
130
140
150
160
170
180
J an-07
Mar-07
May-07
J ul-07
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
J un-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
J un-09
Aug-09
Oct-09
Value
Quality
Momentum
70
80
90
100
110
120
130
Jan-10
Mar-10
May-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Value
Quality
Momentum
Value made an absolute low in
Nov 2008
13
Finding value I: Cheap on Quest for the first time in a long time
Rank by market
cap (>$250m)
Criteria >4>0>3
11 Nov
14
Finding Value II: Time to rejoin the Q
Quest™ market-to-book
A variation on Tobin’s Q which compares market value of a company to the replacement cost of assets
Profits, sales, cash flows and dividends are all unpredictable at present.
Valuation relative to the asset base is more stable.
Excellent track record at market turning points.(Time to get into the Q note – November 2008)
Total market capitalisation (equity + debt + quasi debt)
Quest™ mkt-to-book = --------------------------------------------------------------------------------
Estimated replacement cost of assets
15
80
100
120
140
160
Mar
09
Apr
09
May
09
Jun
09Ju
l 09
Aug
09
Sep
09
Oct
09
Nov
09
Dec
09
Jan
10F
eb 1
0M
ar 1
0A
pr 1
0M
ay 1
0Ju
n 10
Jul 1
0A
ug 1
0S
ep 1
0O
ct 1
0N
ov 1
0D
ec 1
0Ja
n 11
Feb
11
Mar
11
Apr
11
May
11
Jun
11Ju
l 11
Aug
11
Sep
11
Quest valuation Quest market-to-book Revenue multipleDividend yield P/E ratio
UK Value
60
80
100
120
140
160
180
200
Jan 9
0
Apr
90
Jul 9
0
Oct 90
Jan 9
1
Apr
91
Jul 9
1
Oct 91
Jan 9
2
Apr
92
Jul 92
Oc
t 92
Jan 9
3
Apr
93
Jul 9
3
Oct 93
Jan 9
4
Apr
94
Jul 9
4
Oc
t 9
4 60
70
80
90
100
110
120
130
140
150
160Value (Composite)
P/E
Price/Book
DY
DJSTOXX (RH)
Kept outperforming after the other value measures waned.M&A, just –in-time capexsupport a sustained rally
Quest™ market-to-book: the market recovery and beyond
2003-6
1992-4Price to book worked well (Pan Euro)
2009-11Market to book headed the Value charge
and sustained performance
Mkt troughMarch ‘09
Mkt peakFeb ‘11
80
100
120
140
160
180
Mar
03
Apr
03
May
03
Jun
03Ju
l 03
Aug
03
Sep
03
Oct
03
Nov
03
Dec
03
Jan
04F
eb 0
4M
ar 0
4A
pr 0
4M
ay 0
4Ju
n 04
Jul 0
4A
ug 0
4S
ep 0
4O
ct 0
4N
ov 0
4D
ec 0
4Ja
n 05
Feb
05
Mar
05
Apr
05
May
05
Jun
05Ju
l 05
Aug
05
Sep
05
Oct
05
Nov
05
Dec
05
Jan
06F
eb 0
6M
ar 0
6
Quest valuation Quest market-to-book Revenue multipleDividend yield P/E ratio
UK Value
16
Quest™ market-to-book: What is the opportunity? level + dispersion
Market level
Dispersion
Europe ex UK smallUses avg mkt cap for yrUK Large cap
As at 8 Nov
“Time to rejoin the Q”
CITN/ Newsletter articles
“Who is still left in the Q?”
“Slowly moving up the Q”
“Time to get into the Q”
17
UK companies within 10% of 5-year trough Quest™ market-to-book – by size
Rank by market
cap
10 Nov
18
Pan-Euro market to book performance
Quality filters don’t help when the market takes
off
19
Quest™ market-to-book strategies
■ Cheapest companies on market to book
■ Current pricing relative to a long-term view of asset’s productive capacity over their lifetime (Nov 08 note)
Quest™ mkt-to-book
Q-discount (10yr) = ------------------------------------------------------
Cyclical average CFROC / WACC
■ Avoid value traps: Solvency, historic average may overestimate future potential, asset write downs/ badwill
■ What if no mean reversion? – need to consider valuation relative to the ‘new normal’
Quest™ mkt-to-book
Q-discount (+12m) = ------------------------------------------------------ +12m CFROC / WACC
20
Finding Value II: UK Quest market-to-book: Time to rejoin the Q?
21
Value Superscreen – using Quest screening - Criteria
Cheap on Quest for 1st time in a long time
Mkt to book below LRA
Quality filters (optional)
22
Value Superscreen – using Quest screening – Stocks
11 Nov
Ranked by mkt cap
<0.8>5>1>3
Quality filters.1) Lots of debt/quasi
debt .2) Negative EPS
momentum. Signal of risk of
a profit warning?
Criteria
23
Overextended valuations – the other side of the value trade
Outperformed
Mkt to book above LRA
Mkt to book/returns analysis
Lacks value support
Other value metrics
Other risks
24
Overextended valuations – the other side of the value trade<5>5 >1
Rank by market
cap
11 Nov
25
Margins bite, leverage hurts – Fears resurface in Q3■ March/June articles: GDP slowing, commodity prices rising. Peak margins screen combined full valuation
■ Output: Excel spreadsheet (searchable + Filters) + CITN articles + ‘Margins bite, leverage hurts’ note
■ Original articles March/June: 79 names. CITN article highlighted Siemens, Volvo, Aker, Daimler, WH Smith, Philips, PPR, Fiat, Ferrovial, Clariant, Cookson, Lanxess, Sandvik, Pernod Ricard, ABB.
■ Margin stability definition: average historical EBITDA margin (10 years) divided by standard deviation of EBITDA margin over the same period (minimum 5 years required for calculation).
UK Screen as at 10 Nov
23 June CITN
26
Margins plus other risk factors
UK Screen as at 10 Nov
27
Performance of the Q-discount screen from Nov 08-
Pan-euro
Source:Datastream
Rel to WIEROP$
28
Appendices
29
What is Cash Flow Return On Capital?
■ Cash Flow Return On Capital (CFROC)
■ Real
■ Post-tax
■ Return On Gross Invested Capital
■ Shifts from accrual accounting towards cash
■ Better insight into corporate performance and valuation(takes into account all the capital used, asset life, asset mix)
30
CFROC: Step 1 – Accounting to cash
EBIT + Investment & non-operating income + Interest income – Current tax ≈ NOPAT + Dep’n & Amort’n + Rental expense – Tax shield on interest & rent + Monetary working capital adjustment
Non-depreciating assets Land & investment property Fixed asset investments Stock Monetary working capital
+ Depreciating assets Fixed assets at gross cost Fixed assets current cost (adjusted) Capitalised operating leases Intangible assets Cumulative goodwill w/off
€ Gross cash flow
€ Gross investment
Cash in
Cash out
=€ Operating income
€ Operating assets
31
Quest™ valuation
Cash Flow Return On Capital in a DCF model
■ Use Consensus forecasts — 2-years forward
■ Forecast Cash Flow Return On Capital — existing assets
■ Forecast growth rate — reversion to mean
■ Forecast Cash Flow Return On Assets — future investment returns (reversion to mean)
■ Forecast net cash flows — implicit
■ Discount back using WACC for Enterprise Value
