Sustainable Competitive Advantage: Quality
Identify unique elements of a company’s business model (e.g., network effect, low cost advantage, strong brand awareness and high switching costs). Can this company defend and sustain its competitive advantage over the long term?
Competitive Analysis: Quality
Assess barriers to entry, industry rivalry, power of buyers versus suppliers, and substitution threats. Evaluate the entire value chain and profit pool to discern the structural winners in the long term.
Financial Analysis: Quality
Assess balance sheet health (low or no debt is ideal), capital intensity, business mix and margin structure. Require sustainable free cash flow growth, an ability to meet reinvestment needs, and cash flow return on investment above the cost of capital.
Partner with management teams who share our long-term perspective, manage the business with vision and integrity, and whose incentive is aligned with long-term shareholder interests. Evaluate management’s ability to allocate capital to investments creating long-term value.
Growth Drivers: Growth
Evaluate sources and sustainability of profitable growth. Focus on long-term secular and structural growth drivers – dynamics that aren’t likely to change in five years or more. Forecast the growth rate independently of company guidance or Street expectations.
Intrinsic Value Range: Valuation
A company’s value depends on its long-term ability to generate profitable free cash flow growth. The present value of future free cash flows is our core methodology for estimating intrinsic value. Conduct sensitivity analysis of key variables to assess downside risk and focus on high-impact drivers of value. Best-, base-, bear- and worst-case valuation scenarios guide the timing of buy/sell decisions and help guard against decision-making pitfalls.
Expectations Analysis: Valuation
Assess the valuation assumptions implied by the current stock price to differentiate fundamental drivers of value from market sentiment drivers of price. Understand where and how our perspective diverges from that of the market.