The Little Book of Valuation, Updated Edition

Chapter EightValuation Viagra: Valuing Mature Companies

MATURE COMPANIES SUCH AS COCA COLA (KO), Unilever (UL), and General Electric (GE) have been around for generations. They should be easy to value, since they have long periods of operating and market history, with established patterns of investment and financing. But not all long-standing practice is good, and it is possible that changing the way these companies are run can make a difference in value. Coca Cola might be more valuable if it used more debt funding, and Unilever’s value might increase if some of its divisions were spun off as separate entities.

If growth companies get the bulk of their value from growth assets, mature companies must get the bulk of their value from existing investments. If we define mature companies thus, the threshold for being a mature company will vary across markets and across time (the threshold will be higher when economies slow down, as they did in 2008 and 2009, and lower when economies are booming).

The common characteristics of mature companies are:

• Revenue growth is approaching growth rate in the economy: While the growth rate for earnings for mature firms can be high, at least in some years, mature firms will register growth rates in revenues that, if not equal to, will converge on the nominal growth rate for the economy.
• Margins are established: Mature companies tend to have stable ...