1 quest uk themes update – operation style twist 17th january 2012 nigel sedgley +44 (0)20 7523...
TRANSCRIPT
1
Quest™ UK themes update – Operation Style Twist17th January 2012
Nigel Sedgley+44 (0)20 7523 [email protected]
Quest™ helpline+44 (0)20 7523 [email protected]
2
Quest™ framework and tools
M&A
LBO valuation
LBO Superscreen
Quest™ market-to-book (replacement cost of assets)
Deal Watch and analysis
Stocks & Products
Companies in the News
triAngle Escalator
Newsletter
Performance
Style matrix
Quest™ themes
Screening
Screen for stocks
triAngle
Wealth creation
Cash flow returns
Capital deployment
Growth
Value tools
Quest™ valuation
Quest™ market-to-book
LBO FCF yield
triAngle Value (Quest™ + conventional)
Risk management tools
Quest™ Risk Rater
Aggressive/Defensive Indicator
Quest™ triAngle
Momentum
3
2008-2009 all over again?
Operation style twist
The run to safe stocks over the summer was more extreme than in 07/08
Value has seen its longest stretch of UK weakness
How much bad news is priced in?
Value approach in Nov 08 Quest Newsletter delivered strong performance
Value started working before the trough in 08/09
Which Value tools to use? (Stable measures)
Stock screens to find value opportunities and overextended (expensive) situations
4
Q-files
*New* *New*
5
60
70
80
90
100
110
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11
80
90
100
110
120
130
140
150
160
170
Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11
Q-files performance highlight the exponential shift to quality
High Q-score companies outperforming
Volatile companies underperforming
Quest™ Risk Rater
Aggressive defensive indicator
UK large caps (to 3 Jan)
Aggressive Defensive indicator
■ Identifies the most/ least cyclical and volatile companies
■ Based on three measures: EBITDA stabilityCFROA stabilityShare price volatility
■ Measured over 12 years (including forecasts)
■ High deciles (10) indicate defensive, more stable stock
6
Factors and triAngle composition
Quest™ valuation
Quest™ market-to-book
EV/sales rel. LRA
Dividend yield rel. LRA
P/E rel. LRA
CFROC spread
Capital growth
Equilibrium growth
Fixed charge cover
CFROC change
9m-relative trend
100/200-day switch
12m-relative range
30/90 day switch
Earnings momentum
triAngleValue Quality
Momentum
33% 33%
33%
Quest triAngle
Excellent 12- year track record
3-pronged approach improves consistency
UK Large – 42/52 +ve quarters, +4.3% average
Pan-Euro – 36/47 +ve quarters, +3.1% average
UK small – 34/41 +ve quarters, +6.4% average
■ Value, Quality and Momentum ‘ baskets’ are dynamic – driven by current rankings
UK large caps
100
1000
10000
No
v-9
8
Ma
y-9
9N
ov-
99
Ma
y-0
0N
ov-
00
Ma
y-0
1N
ov-
01
Ma
y-0
2N
ov-
02
Ma
y-0
3N
ov-
03
Ma
y-0
4N
ov-
04
Ma
y-0
5N
ov-
05
Ma
y-0
6N
ov-
06
Ma
y-0
7
No
v-0
7M
ay-
08
No
v-0
8M
ay-
09
No
v-0
9M
ay-
10
No
v-1
0M
ay-
11
No
v-1
1
triAngle™
Value
Quality
Momentum
7
2008 all over again? ■ 11 years of live triAngle history
■ Value works in short sharp burst – normally when valuation dispersion is high.
■ During the credit crunch, and now ….Quality and Momentum are the main drivers
Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
8
-15% -10% -5% 0% 5% 10% 15%
triAngle
Value
Quality
Momentum
Quest™ Valn
Quest™ Mkt to Book
EV/Sales rel LRA
Div Yield rel LRA
PE Rel LRA
CFROC Spread*
Capital Growth
Equilibrium growth
Fixed charge Cover
CFROC change
9m relative trend
100/200 day switch
12m relative range
ST Indicator
EPS momentum 3m
-15% -10% -5% 0% 5% 10% 15%
triAngle
Value
Quality
Momentum
Quest™ Valn
Quest™ Mkt to Book
EV/Sales rel LRA
Div Yield rel LRA
PE Rel LRA
CFROC Spread*
Capital Growth
Equilibrium growth
Fixed charge Cover
CFROC change
9m relative trend
100/200 day switch
12m relative range
ST Indicator
EPS momentum 3m
9 negative Q in a row2nd best in a decade
3rd best in a decade
2nd best in a decade
Yield holding up
UK Large
Factor by factor in H2 2011 – Quality and Momentum strong
May-Aug 2011 Aug-Nov 2011
best for over 3 years
More mixed
9
Fixed Charge Cover
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Nov 99
Aug 00
May 01
Feb 02
Nov 02
Aug 03
May 04
Feb 05
Nov 05
Aug 06
May 07
Feb 08
Nov 08
Aug 09
May 10
Feb 11
Nov 11
0
500
1000
1500
2000
2500
3000
3500
4000
Fixed charge Cover* FTSE350
Three months ending at date show n*Live triAngle factor since Feb 04. Previously Ex post backtest. 3m to Feb 04 N/A.
Quality
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Nov 99
Aug 00
May 01
Feb 02
Nov 02
Aug 03
May 04
Feb 05
Nov 05
Aug 06
May 07
Feb 08
Nov 08
Aug 09
May 10
Feb 11
Nov 11
0
500
1000
1500
2000
2500
3000
3500
4000
Quality FTSE350
Three months ending at date show n
Value
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Nov 99
Aug 00
May 01
Feb 02
Nov 02
Aug 03
May 04
Feb 05
Nov 05
Aug 06
May 07
Feb 08
Nov 08
Aug 09
May 10
Feb 11
Nov 11
0
500
1000
1500
2000
2500
3000
3500
4000
Value FTSE350
Three months ending at date show n
Earnings Momentum
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Nov 99
Aug 00
May 01
Feb 02
Nov 02
Aug 03
May 04
Feb 05
Nov 05
Aug 06
May 07
Feb 08
Nov 08
Aug 09
May 10
Feb 11
Nov 11
0
500
1000
1500
2000
2500
3000
3500
4000
EPS momentum 3m FTSE350
Three months ending at date show n
D
triAngle
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Nov 99
Aug 00
May 01
Feb 02
Nov 02
Aug 03
May 04
Feb 05
Nov 05
Aug 06
May 07
Feb 08
Nov 08
Aug 09
May 10
Feb 11
Nov 11
0
500
1000
1500
2000
2500
3000
3500
4000
triAngle FTSE350
Three months ending at date show n
CFROC Spread
-30%
-20%
-10%
0%
10%
20%
30%
Feb 99
Nov 99
Aug 00
May 01
Feb 02
Nov 02
Aug 03
May 04
Feb 05
Nov 05
Aug 06
May 07
Feb 08
Nov 08
Aug 09
May 10
Feb 11
Nov 11
0
500
1000
1500
2000
2500
3000
3500
4000
CFROC Spread* FTSE350
Three months ending at date show n*Pre Feb 04 Avg over 5 historic yrs. Post Feb 04 Avg over 4 Historic, 1 Forecast yr.
triAngle H2 2011 in historic context: Highlights
Best for 3 yrs
3rd Best in a decade
9 neg quarters in a row
In Europe: May-Aug 2011: Value, 2nd worst everFixed charge cover, best since 2003
Quality 2nd best everEarnings Momentum: best for 3 yrs
9 out of 10positive
quarters
2nd best in a decade
10
The troughV,Q neutral,Mmtm -ve
Crisis developingValue –ve, Qual +ve,
Mmtm +ve
History rhymes – where are we now?UK Large
Now(2010-2012)
to 13 Jan 2012
Then(2007-2009)
Market rallyingValue +ve, Qual neutral,
Mmtm -ve
Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
60
70
80
90
100
110
120
130
140
150
160
170
180
J an-07
Mar-07
May-07
J ul-07
Aug-07
Oct-07
Dec-07
Feb-08
Apr-08
J un-08
Aug-08
Oct-08
Dec-08
Feb-09
Apr-09
J un-09
Aug-09
Oct-09
Value
Quality
Momentum
Value made an absolute low in
Nov 2008
60
70
80
90
100
110
120
130
140
Jan-10
Mar-10
May-10
Jun-10
Aug-10
Oct-10
Dec-10
Feb-11
Apr-11
Jun-11
Aug-11
Oct-11
Dec-11
Feb-12
Apr-12
Jun-12
Aug-12
Oct-12
Value
Quality
Momentum
11
-40% -30% -20% -10% 0% 10% 20% 30%
triAngle
Value
Quality
Momentum
Quest™ Valn
Quest™ Mkt to Book
EV/Sales rel LRA
Div Yield rel LRA
PE Rel LRA
CFROC Spread*
Capital Growth
Equilibrium growth
Fixed charge Cover
CFROC change
9m relative trend
100/200 day switch
12m relative range
ST Indicator
EPS momentum 3m
UK end Nov 08-end Feb 09: Value rallied before the market
More stable value measures leading the way
Fixed charge cover: Feb-May 2009 -13%, May-Aug 2009 -7%
A sign of rotation
Quality held up
12
Style matrix
Data to 13th January 2012Source: Top quintile minus bottom quintile on each factor on an equally weighted basis. Non-financials.
13
But how much is now priced in?….. market valuation charts ■ Markets as cheap as Oct 2008-May 2009
■ Corporate action, policy response less likely to be as helpful this time, but less solvency risk.
Prices as at 5 Jan 2012
Quest Mkt-to-book (ex goodwill)
0.0
0.5
1.0
1.5
2.0
2.5
3.0
May
-01
Nov
-01
May
-02
Nov
-02
May
-03
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
Nov
-11
Upper qtlMedianLower qtl
Equities Expensive
Equities Cheap
EV/Sales rel. to trailing 10yr avg
0.00
0.50
1.00
1.50
2.00
May-
01
Nov-
01
May-
02
Nov-
02
May-
03
Nov-
03
May-
04
Nov-
04
May-
05
Nov-
05
May-
06
Nov-
06
May-
07
Nov-
07
May-
08
Nov-
08
May-
09
Nov-
09
May-
10
Nov-
10
May-
11
Nov-
11
Upper qtlMedianLower qtl
Equities Expensive
Equities Cheap
Quest default valuation
-75%
-50%
-25%
0%
25%
50%
75%
Mar-
09
May-
09
Jul-09
Sep-0
9
Nov-
09
Jan-1
0
Mar-
10
May-
10
Jul-10
Sep-1
0
Nov-
10
Jan-1
1
Mar-
11
May-
11
Jul-11
Sep-1
1
Nov-
11
Upper qtlMedianLower qtl
Equities Expensive
Equities Cheap
Earnings yield rel. to trailing 10 yr avg
0.0
1.0
2.0
3.0
4.0
May
-01
Nov
-01
May
-02
Nov
-02
May
-03
Nov
-03
May
-04
Nov
-04
May
-05
Nov
-05
May
-06
Nov
-06
May
-07
Nov
-07
May
-08
Nov
-08
May
-09
Nov
-09
May
-10
Nov
-10
May
-11
Nov
-11
Upper qtlMedianLower qtl
Equities Cheap
Equities Expensive
14
Finding value I: Cheap on Quest for the first time in a long time
Rank by market
cap (>$250m)
Criteria >4>0>3
16 Jan 2012
Warning signals
15
Finding Value II: Time to rejoin the Q
Quest™ market-to-book
A variation on Tobin’s Q which compares market value of a company to the replacement cost of assets
Profits, sales, cash flows and dividends are all unpredictable at present.
Valuation relative to the asset base is more stable.
Excellent track record at market turning points.(Time to get into the Q note – November 2008)
Total market capitalisation (equity + debt + quasi debt)
Quest™ mkt-to-book = --------------------------------------------------------------------------------
Estimated replacement cost of assets
16
80
100
120
140
160
Mar
09
Apr
09
May
09
Jun
09Ju
l 09
Aug
09
Sep
09
Oct
09
Nov
09
Dec
09
Jan
10F
eb 1
0M
ar 1
0A
pr 1
0M
ay 1
0Ju
n 10
Jul 1
0A
ug 1
0S
ep 1
0O
ct 1
0N
ov 1
0D
ec 1
0Ja
n 11
Feb
11
Mar
11
Apr
11
May
11
Jun
11Ju
l 11
Aug
11
Sep
11
Quest valuation Quest market-to-book Revenue multipleDividend yield P/E ratio
UK Value
60
80
100
120
140
160
180
200
Jan 9
0
Apr
90
Jul 9
0
Oct 90
Jan 9
1
Apr
91
Jul 9
1
Oct 91
Jan 9
2
Apr
92
Jul 92
Oc
t 92
Jan 9
3
Apr
93
Jul 9
3
Oct 93
Jan 9
4
Apr
94
Jul 9
4
Oc
t 9
4 60
70
80
90
100
110
120
130
140
150
160Value (Composite)
P/E
Price/Book
DY
DJSTOXX (RH)
Kept outperforming after the other value measures waned.M&A, just –in-time capexsupport a sustained rally
Quest™ market-to-book: the market recovery and beyond
2003-6
1992-4Price to book worked well (Pan Euro)
2009-11Market to book headed the Value charge
and sustained performance
Mkt troughMarch ‘09
Mkt peakFeb ‘11
80
100
120
140
160
180
Mar
03
Apr
03
May
03
Jun
03Ju
l 03
Aug
03
Sep
03
Oct
03
Nov
03
Dec
03
Jan
04F
eb 0
4M
ar 0
4A
pr 0
4M
ay 0
4Ju
n 04
Jul 0
4A
ug 0
4S
ep 0
4O
ct 0
4N
ov 0
4D
ec 0
4Ja
n 05
Feb
05
Mar
05
Apr
05
May
05
Jun
05Ju
l 05
Aug
05
Sep
05
Oct
05
Nov
05
Dec
05
Jan
06F
eb 0
6M
ar 0
6
Quest valuation Quest market-to-book Revenue multipleDividend yield P/E ratio
UK Value
17
Quest™ market-to-book: What is the opportunity? level + dispersion
“Time to rejoin the Q”
“Who is still left in the Q?”
Market level
Dispersion
Europe ex UK smallUses avg mkt cap for yrUK Large cap
“Slowly moving up the Q”
As at Jan 16
Quest market to book (yr avg)
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1.3
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
+12
Current 0.83LRA 0.90
Quest market to book (yr avg)
0.4
0.5
0.6
0.7
0.8
0.9
1.0
1.1
1.2
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
+12
m
Current 0.69LRA 0.80
CITN/ Newsletter articles“Time to get into the Q”
18
UK companies within 10% of 5-year trough Quest™ market-to-book – by size
Rank by market
cap
9 January
19
Pan-Euro market to book performance
Quality filters don’t help when the market takes
off
To 5 Dec 2011
Trough?
20
Quest™ market-to-book strategies
■ Cheapest companies on market to book
■ Current pricing relative to a long-term view of asset’s productive capacity over their lifetime (Nov 08 note)
Quest™ mkt-to-book
Q-discount (10yr) = ------------------------------------------------------
Cyclical average CFROC / WACC
■ Avoid value traps: Solvency, historic average may overestimate future potential, asset write downs/ badwill
■ What if no mean reversion? – need to consider valuation relative to the ‘new normal’
Quest™ mkt-to-book
Q-discount (+12m) = ------------------------------------------------------ +12m CFROC / WACC
21
Finding Value II: UK Quest market-to-book: Time to rejoin the Q?
22
Value Superscreen – using Quest screening - Criteria
Cheap on Quest for 1st time in a long time
Mkt to book below LRA
Quality filters (optional)
23
Value Superscreen – using Quest screening – Stocks
Ranked by mkt cap
<0.8>5>1>3
Quality filters.1) Lots of debt/quasi
debt .2) Negative EPS
momentum. Signal of risk of
a profit warning?
Criteria
16 Jan 2012
Companies which meet the ‘quality filters’
?
24
Overextended valuations – the other side of the value trade
Outperformed
Mkt to book above LRA
Mkt to book/returns analysis
Lacks value support
Other value metrics
Other risks
25
Overextended valuations – the other side of the value trade<5>15 >1
Rank by market
cap
16 Jan 2012
26
Margins bite, leverage hurts – Reporting season poses risks
23 June CITN
■ Designed to explore the risks associated with over-optimism in analysts forecasts
■ March/June articles: GDP slowing, commodity prices rising. Peak margins screen combined full valuation.
■ Forecasts and valuations have fallen but consensus forecasts show forecasts remain high. Consensus forecasts down c3% for 2011, 3% for 2012 (3m, median), but…33% of companies still forecast to be at peak margin.
■ Output: Q-File. Excel spreadsheet (searchable + Filters) + CITN articles
■ Original articles March/June: 79 names. CITN article highlighted Siemens , Volvo, Aker, Daimler, WH Smith, Philips, PPR, Fiat, Ferrovial, Clariant, Cookson, Lanxess, Sandvik, Pernod Ricard, ABB.
■ Margin stability definition: average historical EBITDA margin (10 years) divided by standard deviation of EBITDA margin over the same period (minimum 5 years required for calculation).
27
Margins plus other risk factors
UK Screen as at 9th Jan
28
Performance of the Q-discount screen from Nov 08-
Pan-euro
Source:Datastream
Rel to WIEROP$
29
Appendices
30
What is Cash Flow Return On Capital?
■ Cash Flow Return On Capital (CFROC)
■ Real
■ Post-tax
■ Return On Gross Invested Capital
■ Shifts from accrual accounting towards cash
■ Better insight into corporate performance and valuation(takes into account all the capital used, asset life, asset mix)
31
CFROC: Step 1 – Accounting to cash
EBIT + Investment & non-operating income + Interest income – Current tax ≈ NOPAT + Dep’n & Amort’n + Rental expense – Tax shield on interest & rent + Monetary working capital adjustment
Non-depreciating assets Land & investment property Fixed asset investments Stock Monetary working capital
+ Depreciating assets Fixed assets at gross cost Fixed assets current cost (adjusted) Capitalised operating leases Intangible assets Cumulative goodwill w/off
€ Gross cash flow
€ Gross investment
Cash in
Cash out
=€ Operating income
€ Operating assets
32
Quest™ valuation
Cash Flow Return On Capital in a DCF model
■ Use Consensus forecasts — 2-years forward
■ Forecast Cash Flow Return On Capital — existing assets
■ Forecast growth rate — reversion to mean
■ Forecast Cash Flow Return On Assets — future investment returns (reversion to mean)
■ Forecast net cash flows — implicit
■ Discount back using WACC for Enterprise Value
33
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
Decile10
Decile9
Decile8
Decile7
Decile6
Decile5
Decile4
Decile3
Decile2
Decile1
UK large capSummary - avg Q rel perf by decile
0
25
50
75
100
Decile10
Decile 9 Decile 8 Decile 7 Decile 6 Decile 5 Decile 4 Decile 3 Decile 2 Decile 1
UK large capPositive quarters (%) by decile
Quarterly relative performance % of positive quarters by decile
UK Large cap non financials.Quarterly rebalancing.
Performance relative to FT All share
Performance summary by decile (Nov 2001-Aug 2011)