Historical Equity Spreads within the Chemicals Industry (1976-91)
91)
6
Rohm & Haas
Dow
Dupont
5
IFF
Monsanto
Great Lakes
Union Carbide
4
WD-40
Olin
3
2
1
0
-20%
-16% -12%
-8%
-4%
-0%
4%
8%
12%
Source: Value Line Investment Survey (1992), Marakon Associates analysis.
16%
20%
32%
The M/B vs. E/B Graph
Graph
R2 = .710
R2 = .780
Dow Jones
3.0
Market / Book
3.0
Gannett
Cap. Cities
Harte
Washington Post Co.
2.0
McGraw-Hill
Times Mirror
Knight
Prentice-Hall
N.Y. Times
Time
1.0
Harcourt Brace Jovanovich
Meredith
Macmillan
Phillips
Petroleum Co.
Atlantic
Richfield Co.
Union Oil
Standard Oil Co. of Ind.
Co. of Calif.
Conoco Inc.
Shell
Mobil
Exxon
1.0
Sun
Standard Oil Co. of Calif.
Gulf Oil
2.0
Texaco
0
0
1.0
2.0
3.0
Economic Value* / Book Ratio
PUBLISHING COMPANIES (10-Year Strategic Horizon)
0
0
1.0
2.0
3.0
Economic Value* / Book Ratio
OLD COMPANIES (15-Year Strategic Horizon)
Figure by MIT OCW. *Based on historic (five-year average) values. Source: Compustat, McKinsey analysis.
Source: Lily K. Lai, “Corporate Strategic Planning for a Diversified Company,”, 1983.
Is there a value gap in your company?
•
Are there any businesses in the portfolio that
significantly underperform competitors?
•
Are there any businesses that are out of their start-up
phase and still losing money?
•
Are there any businesses that would clearly be worth
more to someone else due to synergy or operating
economies?
•
Are resources allocated to businesses in a way that
reflects their profitability potential, or do you tend to
overfund losers and underfund winners?
Is there a value gap in your company? (cont’d.)
d.)
•• Is performance measured by using average cost, asset,
and debt allocations, and an arbitrary corporate hurdle
rate?
•• Are any of your long-term incentives tied directly to
relative stock performance or indirectly to the drivers of
shareholder value?
•• Is capital spending driven mostly by capital budgeting
rather than the strategic planning process?
•• Is the company underleveraged? Could the company be
taken private in an LBO at today’s stock price?
•• If the company did go private in an LBO, which assets
would be sold to repay debt? How much overhead could
be cut without damaging the long-term health of the
company?
The Profitability Matrix
Matrix
Return on equity
(ROE)
Profitable
(ROE > kE)
Business cost
of equity capital
(kE)
Unprofitable
(ROE < kE)
+ Spread
+ Cash
+ Share
+ Spread
+ Cash
- Share
- Spread
+ Cash
- Share
a
tr
+ Spread
- Cash
+ Share
Cash Generators
- Spread
+ Cash
+ Share
ls
u
ne
sh
Ca - Spread
- Cash
- Share
Market growth
(G)
Losing share
(g < G)
Cash Users
- Spread
- Cash
+ Share
Growth
(g)
Gaining share
(g > G)
Figure by MIT OCW. Adapted from Marakon Associates. “The Marakon Profitability Matrix,” Commentary No. 7, 1981.
Positive
0%
A
Negative
Spread (ROE - kE)
An Alternative Profitability Matrix
Matrix
p = 60%
p = 75%
p = 90%
C
p = 120%
Losing Share
KEY
p = Reinvestment rate
B
D
1
Gaining Share
Holding Share
Business growth / Industry growth (g/G)
Figure by MIT OCW. Adapted from Marakon Associates. “The Marakon Profitability Matrix,” Commentary No. 7, 1981.