ORGANIC GROWTH INDEX“OGI”

(1996 – 2006)

Edward D. Hess2/24/2008

OGI is a financial model built in 2002 to illuminate high organic growth public companies.

It applies six screens to the top 1000 EVA creating companies (excluding financial companies).

The OGI model results were released for the years 1996 – 2001; 1997 – 2002; and 1998 – 2003.

The Financial Times and Fortune Magazine have written about the model and those results, which were also published in Hess’s two organic growth books and in the Corporate Finance Review.

The beginning sample size in the three new time periods is 801 (1999-2004), 793 (2000-2005), and 799 (2001-2006) companies.

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Background

Six OGI Tests

1) Companies are ranked by EVA/Capital Invested and the top 300 companies move to the next test.

2) Then two growth tests are applied – each company’s SALES CAGR and CFFO CACR are compared to their industry averages to pick companies who have grown above industry averages.

3) Then S&P’s core earnings computation is used to compare a company’s core earnings to its reported net income.

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4) Then a company’s rate of growth of its receivables is compared to its rate of growth of sales to eliminate companies growing receivables much faster than sales.

5) Then, as another quality of earnings test, a company’s cash flow from operations is compared to its net income; and

6) Lastly, companies are eliminated which have acquired more than 35% of their increase in market value during the reporting time period.

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OGI Results

1996 – 2001 1997 – 2002 1998 - 2003

Sample Size 834 862 860

EVA 300 300 300

Passing Growth Tests 170 189 204

Passing Core Earnings Test

121 106 128

Passing AR/Sales Test 93 69 89

Passing Cash Realization Test

87 62 77

Passing M&A Test 68 47 59

“Winners” 68 47 59

In the three prior time periods 45 companies were OGI “winners” in at least two of the three time periods.

1. American Eagle Outfitters, Inc. 16. EOG Resources, Inc. 31. Outback Steakhouse, Inc.

2. Applebee's Intl Inc 17. Ethan Allen Interiors Inc 32. PACCAR, Inc.

3. AptarGroup Inc 18. Express Scripts Inc. 33 Renal Care Group Inc

4. Automatic Data Processing, Inc. 19. Family Dollar Stores, Inc. 34. Rent-A-Center

5. Autozone Inc. 20. Gentex Corporation 35. Roper Industries Inc /DE

6. Avon Products 21. Harley-Davidson, Inc. 36. Ross Stores, Inc.

7. Bed Bath & Beyond, Inc. 22. Home Depot Inc. 37. Smucker (JM) Co

8. Best Buy Co., Inc. 23. Lear Corp. 38. Stryker Corporation

9. Brinker International, Inc. 24. Legget & Platt Inc 39. SYSCO Corporation

10. Cognizant Tech Solutions 25. Lincare Holdings Inc. 40. Teleflex Inc

11. Columbia Sportswear Co. 26. Masco Corp 41. Tiffany & Company

12. Coventry Health Care 27. Molex Inc. 42. Total Systems Services, Inc.

13. Devry Inc. 28. Mylan Laboratories, Inc. 43. Walgreen Co.

14. Dollar General Corporation 29. NVR,Inc. 44. Wal-Mart Stores, Inc.

15. Dollar Tree Stores Inc 30. Omnicom Group, Inc. 45. Waters Corporation

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Prior Results

Of those 45 companies, 16 (36%) were either retail or restaurant chains, leading me to put forth a theory of “replicution”: that high organic growth companies have the ability to scale their business model across geography or large customer segments.

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The OGI Model was applied to three new time periods:

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New Results

1999 – 20042000 – 20052001 - 2006

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New Results (Number of Companies)

1999 – 2004 2000 – 2005 2001 – 2006

Sample Size 801 793 799

Top 300 EVA 299 300 300

Passed Growth Tests 210 206 204

Passed Core Earnings Test 143 143 158

Passed Receivables Test 104 114 100

Passed Cash Realization Test 92 104 98

Passed M&A Test 77 85 85

Final “Winners” 77 85 85

Abercrombie Fitch Choice Hotels Kohls Stericycle

American Eagle Coach L-3 Communications SYSCO

Amerigas Coldwater Creek Lincare Teppco Partners

Ameristar Casinos Columbia Sportswear Liz Clairborne Terex

Apache Oil CoPart Lowes Tesoro

Applebees Costco Magna Int. TJX

Aptargroup Inc Coventry Healthcare Methanex Toro

Armour Holdings Denbury Resources Newfield Exploration TSYS

Avon Dollar General NVR UGI Corp

Barr Pharmaceuticals Dollar Tree Outback Ultra Petroleum

Bed Bath & Beyond Echostar PACCAR United Health

Best Buy Express Scripts Panera Bread UST

Brinker International Family Dollar Patterson Valero Energy

CH Robinson Harman International Publix Walgreens

Career Education Holly Corp. Questar Weight Watchers

Carnival Corporation Hormel Ross Stores

Chesapeake Energy Int. Game Technology Schein

Chicago Bridge ITT Education Sonic

Chicos Kinder Morgan St. Mary Land & Exploration

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NEW RESULTS

72 Winners (in at least two time periods)

98 – 03 99 – 04 00 – 05 01 – 06

68% 70% 69% 68%

63% 68% 69% 77%

70% 73% 80% 63%

87% 88% 91% 98%

77% 84% 82% 87%

7% 10% 11% 11%

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Test 96-01 97-02

Growth Tests 57% 63%

Core Earning Test 71% 56%

AR/Sales Test 77% 65%

Cash Realization Test 94% 90%

M&A Test 78% 76%

Final Sample

(% of Beginning Sample)

8% 5%

Test Passing Rates

Tests 96 – 01 97 – 02 98 – 03 99 – 04 00 – 05 01 – 06

Growth Tests 43% 37% 32% 30% 31% 32%

Core Earnings Test 29% 44% 37% 32% 31% 23%

AR/Sales Test 23% 35% 30% 27% 20% 37%

Cash Realization Test 6% 10% 13% 12% 9% 2%

M&A Test 22% 24% 23% 16% 18% 13%

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Test Failure Rates

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INDUSTRY CONCENTRATION

Ending Year

Industry 2001 2002 2003 2004 2005 2006

Oil & Gas 1% 0% 7% 12% 18% 9%

Hotels, Restaurant & Leisure

7% 9% 10% 16% 14% 13%

Retail 24% 32% 27% 21% 18% 24%

Healthcare 6% 9% 12% 10% 6% 12%

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BEGINNING SIZE: Top 300 EVA Companies

Study < $2B $2-10B >$10B

(1996-2001) 51% 34% 15%

(1997-2002) 47% 38% 16%

(1998-2003) 47% 37% 17%

(1999-2004) 56% 28% 16%

(2000-2005) 53% 30% 17%

(2001-2006) 44% 37% 19%

Size = Market Cap

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27 ALL STARS

27 Companies passed the tests in at least 4 different time periods

6 Time Winners 5 Time Winners 4 Time Winners

American Eagle Outfitters Avon Products Aptargroup Inc.

Best Buy Co. Inc. Family Dollar Stores CoPart Inc.

Brinker Int. Inc. Paccar Inc. Dollar General

SYSCO Corp. Ross Stores Inc. Omnicom Group

Walgreen Co. NVR Inc. Hormel Foods Corp

Applebee’s Intl. Inc. Coventry Health Care Intl. Game Technology

OSI Restaurant Partners Columbia Sportswear Co. Lowe’s Companies Inc.

Bed Bath & Beyond Inc. Total System Services

Express Scripts Inc. TJX Companies Inc.

Dollar Tree Stores Inc. Lincare Holdings

1996-2006

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27 ALL STARS

Stock Returns Comparisons

With Dividends

WithoutDividends

DJIA S&P 500NASDAQ

100

27 All Stars

1996-2006 1481.44% 1368.82% 143.56% 130.27% 204.90%

27 ALL STARS 

13 Retail or Restaurant Chains

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27 ALL STARS

Average Years in Business: 46

Oldest Companies Youngest Companies

Avon 121 OSI 19

Hormel Foods 116 Express Scripts 21

Walgreen 106 Dollar Tree Stores 21

Paccar 102 Coventry Health Care 21

Omnicom Group 21

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27 ALL STARS

Gross Revenue Average (in Millions): $12,119

Highest Revenues (in Millions) Lowest Revenues (in Millions)

Walgreen 47,409

CoPart 529

Lowe’s 46,927 Columbia Sportswear 1,288

Sysco 32,628 Applebee’s Int’l 1,338

Best Buy 30,848 Lincare Holdings 1,410

American Eagle Outfitters 27,940 AptarGroup 1,601

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27 ALL STARS

Market Cap. Average:

Market Cap. < 2B:

Market Cap. 2-10B:

Market Cap. > 10B:

9.72B

3 companies

14 companies

10 companies

Largest Companies Smallest Companies

Lowe’s 35B Columbia Sportswear 1.48B

Walgreen 34B Brinker Int’l 1.78B

Best Buy 19B Applebee’s Int’l 1.92B

Sysco 18B Dollar Tree Stores 2.32B

Avon 17B AptarGroup 2.36B

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27 ALL STARS

Average Employee Number: 52,761

Largest Companies Smallest Companies

Walgreen 226,000 CoPart 2,536

Lowe’s 157,000 Columbia Sportswear 2,810

Best Buy 140,000 NVR 4,548

TJX 125,000 Int’l Game Technology 5,200

OSI 116,000 Total System Services 6,644

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24 ALL STARS(Excluding Applebee’s, OSI, and Dollar General)

Average CEO Years with Company:

CEOs with MBA Degree:

CEOs with Law Degree:

Average CEO Compensation (in Millions):

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3

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$5.75

Highest Compensation (in Millions) Lowest Compensation (in Millions)

American Eagle Outfitters $15.3

Best Buy $1.2

Avon $13.3 Sysco $1.3

Omnicom Group $13.2 Dollar Tree Stores $1.6

Coventry Health Care $12.9 CoPart $1.7

(Sources: applicable SEC Schedule 14-A)

Company 96 – 01 97 – 02 98 – 03 99 – 04 00 – 05 01 – 06

Abercrombie Fitch

Coldwater Creek

CoPart

Chicos

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What Changed?

V = Winner

Company 96 – 01 97 – 02 98 – 03 99 – 04 00 – 05 01 – 06

Harman Int

Holly Corp

Hormel

ITT Education

Int Game Technology

Lowes

Sonic

TJX

Terex V V V

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What Changed?

V = Winner

Company 96 – 01 97 – 02 98 – 03 99 – 04 00 – 05 01 – 06

JM Smucker

Ethan Allen

EOG

ADP

Gentex

Harley-Davison

Mylan Labs

Omnicom

Ruby Tuesday

Stryker

Wal-Mart

Waters

Autozone

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What Happened?

V=Winner