The logical train of reasoning we have been outlining links financial statement information and a firm's key profitability metrics to the elements of the conceptual valuation models. In this chapter, we demonstrate the links more explicitly by illustrating the approach we have adopted in ModelWare, and describe how we apply the conceptual foundation in practice.
To illustrate what we are doing we use Sears Holdings with a hypothetical valuation as of the date of writing.1 Although not ideal for illustrating some aspects of the model, we choose Sears because it is a newly created company with no meaningful history, the company does not give guidance about its strategy, and investors have had widely differing views of the intrinsic value of the company. The price volatility over the last 16 months reflects this difference. Figure 18.1 shows the basic components that go into the valuation model and the intrinsic value measure at the start of the year and one year later. The key inputs to the model are as follows: