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Beyond Earnings

Book Description

Step up stock selection with advanced valuation techniques

Beyond Earnings provides finance professionals with the most advanced techniques available for complex valuation and corporate performance analysis. Deep in detail and comprehensive in scope, this book features the first empirical discussion of mean-reversion in corporate profitability and growth, with expert guidance toward practical solutions. By focusing on cash flow and the economics of a company’s performance, the discussion relates a more effective process for stock screening, selection, and valuation. Step-by-step calculations guide you through the application of the HOLT CFROI and Economic Profit approaches for measuring operating performance, and expert insight from Credit Suisse researchers and consultants sheds new light on familiar situations.

Stock selection is the critical point in the performance matrix, and screening and valuation practices weigh heavily into a firm’s performance. As investors face increasing pressure to perform at ever-higher levels, this book provides essential analysis methods that help paint a more complete picture of a potential investment’s performance.

  • Assess a firm’s performance accurately by adjusting for accounting distortions
  • Calculate economic profit and CFROI
  • Estimate future cash flow, profit streams, and the firm’s value
  • Model terminal value and eliminate the perpetuity assumption

The effort to outperform benchmarks and exchange-traded funds grows increasingly Sisyphean as professional investors face mounting pressure from all sides. When the market is not performing to the level required to attain strategic goals, smarter stock selection becomes the lynchpin of high-performing firms. Advanced modeling provides an edge over traditional models in that it paints a truer picture of a corporation’s status, and extends that vision further into the future to facilitate more educated decision-making. Beyond Earnings is the professional manual to enhanced stock analysis and valuation, with invaluable guidance you won’t find anywhere else. 

Table of Contents

  1. COVER
  2. TITLE PAGE
  3. INTRODUCTION
    1. THE PRICING PUZZLE: FOUNDATIONAL HOLT CONCEPT AND A KEY TO BETTER VALUATION
    2. OVERVIEW OF BOOK CHAPTERS
    3. WHO ARE WE AND WHAT DO WE HOPE TO ACHIEVE
    4. NOTES
  4. Section I: Financial Performance Assessment
    1. 1 NEVER FORGET THE GOLDEN RULE: PURSUE STRATEGIES WITH POSITIVE NPV
      1. KEY LEARNING POINTS
      2. INTRODUCTION
      3. WHAT DO CORPORATE FINANCIAL MANAGERS DO DURING THE DAY?
      4. WHAT IS VALUE?
      5. THE GOLDEN RULE OF FINANCIAL DECISION MAKING
      6. BACK‐OF‐THE‐ENVELOPE BASICS
      7. IS THE NPV RULE FOOLPROOF?
      8. THE PRICE OF SHORT‐TERMISM
      9. THINKING CLEARLY ABOUT ACTIONS, REACTIONS, AND VALUE
      10. NOTES
    2. 2 THE FLYING TRAPEZE OF PERFORMANCE METRICS
      1. KEY LEARNING POINTS
      2. MEASURES OF CORPORATE PERFORMANCE
      3. RETURN ON EQUITY
      4. WHAT ABOUT DEBT AND LEVERAGE?
      5. RETURN ON ASSETS
      6. RETURN ON INVESTED CAPITAL
      7. P/E AS A VALUATION METRIC AND DISCOUNTED CASH FLOW VALUATION APPROACH
      8. HALLMARKS OF A SOUND ECONOMIC PERFORMANCE AND VALUATION MODEL
      9. CHAPTER APPENDIX
      10. NOTES
    3. 3 ACCOUNTING TO CASH FLOW RETURN ON INVESTMENT
      1. KEY LEARNING POINTS
      2. IS CFROI A BETTER MEASURE OF PERFORMANCE?
      3. CFROI ADJUSTMENTS USING AMAZON’S 2013 ANNUAL REPORT
      4. UNDERSTANDING THE RELATIVE WEALTH CHART
      5. A COMMENT ON GOODWILL
      6. CHAPTER APPENDIX: GROSS PLANT RECAPTURED
      7. NOTES
  5. Section II: Discounted Cash Flow and Economic Profit Valuation
    1. 4 WHAT’S IT WORTH? VALUING THE FIRM
      1. KEY LEARNING POINTS
      2. A REVIEW OF CONVENTIONAL VALUATION APPROACHES
      3. HOLT APPROACH TO FCFF VALUATION
      4. NOTES
    2. 5 QUANTIFYING THE VALUE AND RISK OF A COMPANY’S CAP
      1. KEY LEARNING POINTS
      2. INTRODUCTION
      3. THE WORST INVESTMENT I EVER MADE
      4. QUANTIFYING THE MAGNITUDE AND SUSTAINABILITY OF CAP
      5. THOUGHT EXPERIMENT: THE VALUATION OF CORE UNLIMITED
      6. THE PROBABILITY OF PERMANENT DISRUPTION
      7. THE CHARACTERISTICS OF COMPETITIVE ADVANTAGE
      8. FADE IS A VALUE DRIVER
      9. THE FUNDAMENTAL PRICING MODEL
      10. THE VALUE DRIVER TREE
      11. INVESTMENT GROWTH IS A VALUE DRIVER
      12. APPLYING THE FUNDAMENTAL PRICING MODEL
      13. FINAL THOUGHTS FOR THE MOMENT
      14. CHAPTER APPENDIX
      15. NOTES
    3. 6 HOLT ECONOMIC PROFIT
      1. KEY LEARNING POINTS
      2. INTRODUCTION
      3. CALCULATING CFROI AS A RATIO
      4. HOLT ECONOMIC PROFIT
      5. THE POWER OF SIMPLICITY: SPREAD, FADE, AND GROWTH IN AN EP FRAMEWORK
      6. USING ECONOMIC PROFIT TO MEASURE THE VALUE OF ACQUISITIONS
      7. DECOMPOSING VALUE CREATION INTO DELTA EP COMPONENTS
      8. WHAT ABOUT GOODWILL?
      9. NOTES
    4. 7 RISK, REWARD, AND THE HOLT DISCOUNT RATE
      1. KEY LEARNING POINTS
      2. RISK, RETURN, AND DIVERSIFICATION
      3. HOW LARGE IS THE EQUITY RISK PREMIUM (ERP)?
      4. SHOULD I USE THE ARITHMETIC OR GEOMETRIC AVERAGE?
      5. OTHER RISK FACTORS TO CONSIDER
      6. INTRODUCTION TO THE HOLT APPROACH OF ESTIMATING A FIRM’S DISCOUNT RATE
      7. RELATING THE HOLT DISCOUNT RATE AND FRAMEWORK TO CAPM AND APV
      8. CHAPTER APPENDIX: DO EQUITY DISCOUNT RATES MEAN REVERT?
      9. NOTES
  6. Section III: Value Driver Forecasting
    1. 8 THE COMPETITIVE LIFE‐CYCLE OF CORPORATE EVOLUTION
      1. KEY LEARNING POINTS
      2. INTRODUCTION
      3. WHAT IS FADE?
      4. THE COMPETITIVE LIFE‐CYCLE
      5. QUESTION MARKS (EARLY LIFE‐CYCLE)
      6. ESSENTIAL FACTS ABOUT THE COMPETITIVE LIFE‐CYCLE
      7. NOTES
    2. 9 THE PERSISTENCE OF CORPORATE PROFITABILITY
      1. KEY LEARNING POINTS
      2. LONG‐TERM REAL RETURN ON INVESTMENT
      3. THE LONG‐TERM REAL REQUIRED RATE OF RETURN
      4. MEASURING PERSISTENCE
      5. PUTTING IT ALL TOGETHER: DEVELOPING A MEAN‐REVERTING FORECAST MODEL
      6. CONCLUSION
      7. NOTES
    3. 10 FORECASTING GROWTH
      1. KEY LEARNING POINTS
      2. MEDIAN REAL ASSET GROWTH RATE
      3. THE AVERAGE GROWTH RATE AS COMPANIES MATURE
      4. IS CORPORATE GROWTH MEAN‐REVERTING?
      5. THE SUSTAINABILITY OF GROWTH
      6. FORECASTING GROWTH
      7. CONCLUSIONS
      8. NOTES
    4. 11 EVALUATING MARKET EXPECTATIONS
      1. KEY LEARNING POINTS
      2. THE RELATIVE WEALTH CHART AS A DECISION AID FOR EFFICIENTLY ASSESSING STOCK OPPORTUNITIES
      3. DISTILLING EXPECTATIONS FROM A STOCK PRICE
      4. CAN IT BEAT THE FADE?
      5. THE GREEN DOT
      6. THINKING ABOUT EXPECTATIONS AT DIFFERENT LIFE‐CYCLE STATES
      7. WHY THE GREEN DOT IS SO HELPFUL
      8. PICKING STOCKS ACROSS THE LIFE‐CYCLE
      9. FINAL REMARKS
      10. CHAPTER APPENDIX: GAUGING EXPECTATIONS USING PVGO
      11. NOTES
    5. 12 CLOSING THOUGHTS
      1. NOTE
  7. INDEX
  8. END USER LICENSE AGREEMENT