The Light Side of Valuation

If volatility in earnings is a given at cyclical and commodity companies, and forecasting the cycles that cause the volatility is often impossible, how can we value such companies? This section examines healthy responses to the volatility in the valuation of these companies.

Discounted Cash Flow Valuation

Chapter 2 noted that a company’s discounted cash flow value rests on four inputs—earnings and cash flows from existing assets, the growth in these cash flows in the near term, a judgment about when the company will become mature, and a discount rate to apply to the cash flows. Using this framework, we will develop two ways of adapting discounted cash flow valuations for cyclical and commodity companies. In the first, ...

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