Webinar - Valuing Companies & Three Proven Metrics
A nuanced and above all disciplined approach to valuing quality compounders
Hi fellow Tortoise!
Valuing companies, understanding true shareholder value creation, explaining valuation differences and building a high-quality growth portfolio: easier said than done.
And to be fair: investing can be made simple but not easy. We don’t have to make it overly complicated, just as long as we focus on the key principles and don’t lose sight of specific elements (such as lease liabilities, right-of-use assets vs. the actual value).
ROIC is a nuanced metric, and therefore, we should broaden our analytical toolkit with other ratios that contextualize performance and expectations.
When ROIC is a Flawed Metric - 5 Scenarios (and Examples)
Introduction Return on Invested Capital is one of the most important metrics to assess a company’s capital efficiency and effectiveness of reinvestments. Notwithstanding the obvious conclusions one can draw from ROIC (the higher the better, is it above-average, does the company have reinvestment opportunities),
Where can we still find attractive opportunities to deploy new capital?
Content
The table of contents for this webinar:
ROIC, IRR and economic profit: the trinity for compounding shareholder value
What’s the difference between Linde Plc and Air Products
The earnings bonanza is now behind us: little has changed
Valuing companies: presenting our common sense approach + how lease liabilities/right-of-use assets can distort ROIC, underlying free cash flow and a company’s fair value. We used Teqnion as an example
Portfolio strategy: what are we aiming for?
Philosophy
As a reminder:
Our stock investment portfolio is concentrated in our highest-conviction ideas (13 stocks right now). It typically takes several weeks or even months before our rigorous research process on a potential new name is fully completed.
Before we got involved in private M&A-dealmaking, our stock watchlist and portfolio consisted of 30+ names. And for us, it was impractical to follow up on each of the screened stocks in great detail. So don’t expect a continuous stream of new ideas from us.
Portfolio characteristics
Time is the friend of a great business that can compound its invested capital at a fast clip, whilst keeping financial risks low. Here are some features of our stock investment portfolio:
Weighted average return on capital on organic growth: >40% (after tax)
Weighted average return on total invested capital (incl. M&A): 20-25% (after tax)
Weighted re-investment rate: >50% of NOPAT
Weighted dividend payout: approximately 26% of NOPAT
Weighted buybacks: approximately 9% of NOPAT
Weighted average EV/NOPAT (2024): 25x
Based on the above, annual earnings growth is projected to come in at roughly 12% to 15%. We’ll get a 0.7% dividend yield and 0.35% buyback yield. That’s 13% to 16% total IRR, before any assumption on declining or rising valuation multiples after taking a position. It’s far better to benchmark your fundamental portfolio characteristics than its (short-term) stock performance.
Webinar and material
You can watch the webinar through the below inserted video. The presentation material can be downloaded via PDF.