ORGANIC GROWTH INDEX
“OGI”
(1996 – 2006)
Edward D. Hess
2/24/2008
Background
OGI is a financial model built in 2002 to illuminate high
organic growth public companies.
It applies six screens to the top 1000 EVA creating companies
(excluding financial companies).
The OGI model results were released for the years 1996 –
2001; 1997 – 2002; and 1998 – 2003.
The Financial Times and Fortune Magazine have written
about the model and those results, which were also published in
Hess’s two organic growth books and in the Corporate Finance
Review.
The beginning sample size in the three new time periods is
801 (1999-2004), 793 (2000-2005), and 799 (2001-2006)
companies.
1
Six OGI Tests
1) Companies are ranked by EVA/Capital Invested and
the top 300 companies move to the next test.
2) Then two growth tests are applied – each company’s
SALES CAGR and CFFO CACR are compared to
their industry averages to pick companies who have
grown above industry averages.
3) Then S&P’s core earnings computation is used to
compare a company’s core earnings to its reported
net income.
2
4) Then a company’s rate of growth of its
receivables is compared to its rate of growth
of sales to eliminate companies growing
receivables much faster than sales.
5) Then, as another quality of earnings test, a
company’s cash flow from operations is
compared to its net income; and
6) Lastly, companies are eliminated which have
acquired more than 35% of their increase in
market value during the reporting time period.
3
OGI Results
1996 – 2001
1997 – 2002
1998 - 2003
Sample Size
834
862
860
EVA
300
300
300
Passing Growth Tests
170
189
204
Passing Core Earnings
Test
121
106
128
Passing AR/Sales Test
93
69
89
Passing Cash Realization
Test
87
62
77
Passing M&A Test
68
47
59
“Winners”
68
47
59
4
Prior Results
In the three prior time periods 45 companies were OGI
“winners” in at least two of the three time periods.
1. American Eagle Outfitters, Inc.
16. EOG Resources, Inc.
31. Outback Steakhouse, Inc.
2. Applebee's Intl Inc
17. Ethan Allen Interiors Inc
32. PACCAR, Inc.
3. AptarGroup Inc
18. Express Scripts Inc.
33 Renal Care Group Inc
4. Automatic Data Processing, Inc.
19. Family Dollar Stores, Inc.
34. Rent-A-Center
5. Autozone Inc.
20. Gentex Corporation
35. Roper Industries Inc /DE
6. Avon Products
21. Harley-Davidson, Inc.
36. Ross Stores, Inc.
7. Bed Bath & Beyond, Inc.
22. Home Depot Inc.
37. Smucker (JM) Co
8. Best Buy Co., Inc.
23. Lear Corp.
38. Stryker Corporation
9. Brinker International, Inc.
24. Legget & Platt Inc
39. SYSCO Corporation
10. Cognizant Tech Solutions
25. Lincare Holdings Inc.
40. Teleflex Inc
11. Columbia Sportswear Co.
26. Masco Corp
41. Tiffany & Company
12. Coventry Health Care
27. Molex Inc.
42. Total Systems Services, Inc.
13. Devry Inc.
28. Mylan Laboratories, Inc.
43. Walgreen Co.
14. Dollar General Corporation
29. NVR,Inc.
44. Wal-Mart Stores, Inc.
15. Dollar Tree Stores Inc
30. Omnicom Group, Inc.
45. Waters Corporation
5
Of those 45 companies, 16 (36%) were
either retail or restaurant chains, leading
me to put forth a theory of “replicution”:
that high organic growth companies have
the ability to scale their business model
across geography or large customer
segments.
6
New Results
The OGI Model was applied to three new time
periods:
1999 – 2004
2000 – 2005
2001 - 2006
7
New Results (Number of Companies)
1999 – 2004
2000 – 2005
2001 – 2006
Sample Size
801
793
799
Top 300 EVA
299
300
300
Passed Growth Tests
210
206
204
Passed Core Earnings Test
143
143
158
Passed Receivables Test
104
114
100
Passed Cash Realization Test
92
104
98
Passed M&A Test
77
85
85
Final “Winners”
77
85
85
8
NEW RESULTS
72 Winners (in at least two time periods)
Abercrombie Fitch
Choice Hotels
Kohls
Stericycle
American Eagle
Coach
L-3 Communications
SYSCO
Amerigas
Coldwater Creek
Lincare
Teppco Partners
Ameristar Casinos
Columbia Sportswear
Liz Clairborne
Terex
Apache Oil
CoPart
Lowes
Tesoro
Applebees
Costco
Magna Int.
TJX
Aptargroup Inc
Coventry Healthcare
Methanex
Toro
Armour Holdings
Denbury Resources
Newfield Exploration
TSYS
Avon
Dollar General
NVR
UGI Corp
Barr Pharmaceuticals
Dollar Tree
Outback
Ultra Petroleum
Bed Bath & Beyond
Echostar
PACCAR
United Health
Best Buy
Express Scripts
Panera Bread
UST
Brinker International
Family Dollar
Patterson
Valero Energy
CH Robinson
Harman International
Publix
Walgreens
Career Education
Holly Corp.
Questar
Weight Watchers
Carnival Corporation
Hormel
Ross Stores
Chesapeake Energy
Int. Game Technology
Schein
Chicago Bridge
ITT Education
Sonic
Chicos
Kinder Morgan
St. Mary Land & Exploration
9
Test Passing Rates
96-01
97-02
98 – 03
99 – 04
00 – 05
01 – 06
Growth Tests
57%
63%
68%
70%
69%
68%
Core Earning Test
71%
56%
63%
68%
69%
77%
AR/Sales Test
77%
65%
70%
73%
80%
63%
Cash Realization Test
94%
90%
87%
88%
91%
98%
M&A Test
78%
76%
77%
84%
82%
87%
8%
5%
7%
10%
11%
11%
Test
Final Sample
(% of Beginning Sample)
10
Test Failure Rates
Tests
96 – 01
97 – 02
98 – 03
99 – 04
00 – 05
01 – 06
Growth Tests
43%
37%
32%
30%
31%
32%
Core Earnings Test
29%
44%
37%
32%
31%
23%
AR/Sales Test
23%
35%
30%
27%
20%
37%
6%
10%
13%
12%
9%
2%
22%
24%
23%
16%
18%
13%
Cash Realization Test
M&A Test
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INDUSTRY CONCENTRATION
Ending Year
Industry
2001
2002
2003
2004
2005
2006
Oil & Gas
1%
0%
7%
12%
18%
9%
Hotels, Restaurant
& Leisure
7%
9%
10%
16%
14%
13%
24%
32%
27%
21%
18%
24%
6%
9%
12%
10%
6%
12%
Retail
Healthcare
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BEGINNING SIZE: Top 300 EVA Companies
Study
< $2B
$2-10B
>$10B
(1996-2001)
51%
34%
15%
(1997-2002)
47%
38%
16%
(1998-2003)
47%
37%
17%
(1999-2004)
56%
28%
16%
(2000-2005)
53%
30%
17%
(2001-2006)
44%
37%
19%
Size = Market Cap
13
1996-2006
27 ALL STARS
27 Companies passed the tests in at least 4 different time periods
6 Time Winners
5 Time Winners
4 Time Winners
American Eagle Outfitters
Avon Products
Aptargroup Inc.
Best Buy Co. Inc.
Family Dollar Stores
CoPart Inc.
Brinker Int. Inc.
Paccar Inc.
Dollar General
SYSCO Corp.
Ross Stores Inc.
Omnicom Group
Walgreen Co.
NVR Inc.
Hormel Foods Corp
Applebee’s Intl. Inc.
Coventry Health Care
Intl. Game Technology
OSI Restaurant Partners
Columbia Sportswear Co.
Lowe’s Companies Inc.
Bed Bath & Beyond Inc.
Total System Services
Express Scripts Inc.
TJX Companies Inc.
Dollar Tree Stores Inc.
Lincare Holdings
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27 ALL STARS
Stock Returns Comparisons
With
Dividends
Without
Dividends
DJIA
S&P 500
NASDAQ
100
1481.44%
1368.82%
143.56%
130.27%
204.90%
27 All Stars
1996-2006
27 ALL STARS
13 Retail or Restaurant Chains
15
27 ALL STARS
Average Years in Business:
46
Oldest Companies
Youngest Companies
Avon
121
OSI
19
Hormel Foods
116
Express Scripts
21
Walgreen
106
Dollar Tree Stores
21
Paccar
102
Coventry Health Care
21
Omnicom Group
21
16
27 ALL STARS
Gross Revenue Average (in Millions):
Highest Revenues (in Millions)
$12,119
Lowest Revenues (in Millions)
Walgreen
47,409
CoPart
Lowe’s
46,927
Columbia Sportswear
1,288
Sysco
32,628
Applebee’s Int’l
1,338
Best Buy
30,848
Lincare Holdings
1,410
AptarGroup
1,601
American Eagle Outfitters 27,940
529
17
27 ALL STARS
Market Cap. Average:
9.72B
Market Cap. < 2B:
3 companies
Market Cap. 2-10B:
14 companies
Market Cap. > 10B:
10 companies
Largest Companies
Smallest Companies
Lowe’s
35B
Columbia Sportswear
1.48B
Walgreen
34B
Brinker Int’l
1.78B
Best Buy
19B
Applebee’s Int’l
1.92B
Sysco
18B
Dollar Tree Stores
2.32B
Avon
17B
AptarGroup
2.36B
18
27 ALL STARS
Average Employee Number:
52,761
Largest Companies
Smallest Companies
Walgreen
226,000
CoPart
2,536
Lowe’s
157,000
Columbia Sportswear
2,810
Best Buy
140,000
NVR
4,548
TJX
125,000
Int’l Game Technology
5,200
OSI
116,000
Total System Services
6,644
19
24 ALL STARS
(Excluding Applebee’s, OSI, and Dollar General)
Average CEO Years with Company:
21
CEOs with MBA Degree:
3
CEOs with Law Degree:
2
Average CEO Compensation (in Millions):
Highest Compensation (in Millions)
$5.75
Lowest Compensation (in Millions)
American Eagle Outfitters
$15.3
Best Buy
$1.2
Avon
$13.3
Sysco
$1.3
Omnicom Group
$13.2
Dollar Tree Stores
$1.6
Coventry Health Care
$12.9
CoPart
$1.7
(Sources: applicable SEC Schedule 14-A)
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What Changed?
V = Winner
Company
96 – 01
97 – 02
98 – 03
99 – 04
00 – 05
01 – 06
Abercrombie Fitch



Coldwater Creek

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






CoPart
Chicos

21
What Changed?
V = Winner
Company
96 – 01 97 – 02 98 – 03 99 – 04 00 – 05
01 – 06
Harman Int



Holly Corp









Hormel

ITT Education
Int Game Technology




Lowes










V
V
V
Sonic
TJX
Terex

22
What Happened?
V=Winner
Company
96 – 01
JM Smucker
97 – 02
98 – 03


Ethan Allen

EOG

ADP


Gentex





Harley-Davison
00 – 05
01 – 06

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Mylan Labs


Omnicom





Ruby Tuesday
99 – 04
Stryker


Wal-Mart


Waters


Autozone




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23