The Applied Finance Group’s (AFG’s) research and suite of investment tools help investors to easily understand a company’s true economic profitability, as well as if the company’s asset management policy is suitable to maximize that profitability. AFG’s Wealth Creation Report (WCR) allows you to visually analyze a company’s historical Economic Margin (EM) level, current EM and expected change in EM based on projections built out by AFG’s default valuation model, which takes into account the total cash flow a company delivers. A company that earns above its cost of capital (positive Economic Margins) and is growing its asset base is considered to be following a wealth-creating strategy. Back-tests have proven these companies to be more likely to outperform those companies following a wealth-destroying strategy (negative Economic Margins and growing assets).
Below is an example of The Procter & Gamble Company (NYSE:PG), a company AFG considers to be a consistent wealth creator, identified by using AFG’s Wealth Creation Report (3 parts of this chart explained in greater detail below).
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AFG’s valuation techniques also help investors identify and take advantage of mispriced securities in the market. One way investors can identify over or undervalued stocks is by using AFG’s Intrinsic Value Chart, which displays a company’s intrinsic value relative to its trading range and helps entry/exit points.
This easy to read chart identifies how far a stock’s trading range deviates from its intrinsic value (target price assuming immediate decay), which helps you recognize potentially mispriced stocks and pursue long and short opportunities. AFG’s Intrinsic Value Chart also contains a company’s Value Score (ranked valuation attractiveness), Economic Margin Change (expected improvement of economic profitability), and Accuracy (how well AFG’s default valuation has tracked the company) information. AFG’s valuation framework estimates a company’s equity value by subtracting debt and other liabilities from the total enterprise value. The total enterprise value is estimated by discounting projected future cash flows, utilizing analyst consensus, Economic Margin methodology, and the Decay concept which addresses the perpetuity bias in the traditional DCF model.
The Procter & Gamble Company, is a company that currently looks undervalued according to AFG’s default valuation model. An important fact to note is that AFG has shown it tracks PG well (high accuracy score of 75). Also, PG has a current AFG Value Score of 74, meaning the company ranks in the top 74th percentile of companies in the AFG universe in valuation attractiveness.
AFG's Wealth Creation Report is a 3 part chart:
The first chart is a summary of a company’s economic performance over time, as well as insight into how analyst EPS forecasts project AFG’s default EMs over the next two years.
• EM – Productive Capital = (Cash Flow minus Capital Charge excluding Intangibles) divided by the Inflation Adjusted Productive Capital.
• EM – Invested Capital = (Cash Flow minus Capital Charge including Intangibles) divided the by Inflation Adjusted Productive Capital.
•Val Score = Ranked Percent To Target for the current calendar yr. where 100 is the most undervalued and 0 is the most overvalued (ranked across all firms in database with forecasts for 4,000 firms).
• EM Chg = One year out forecast EM minus last reported fiscal year's EM. Invested Capital EM is used.
The second part of the chart is the Asset Growth chart allows additional insight not only the growth of a company, but how that company’s growth strategy has affected their economic performance.
• Assets – Steady Growth (1 Yr) = The real growth rate at which a firm can increase its capital base given internally generated cash, while maintaining a constant capital structure.
• Assets – Actual Growth (1 Yr) = Real year over year change in Inflation Adjusted Invested Capital achieved by the firm. Note: All actual growth is “actual”, i.e. 2007 growth represents growth from most recent quarterly balance sheet.
This data can then be used to identify how the stock has performed in relation to the market place.
• Return Net Market = The company's cumulative total return relative to the cumulative market-weighted average total return of the largest 2000 companies for the equivalent time period.
AFG’s Intrinsic Value Chart:
• Identifies entry/exit points
• Shows how well AFG has tracked the company (accuracy)
• Displays the trading range of the company each year through time (blue bars)
• Displays the end of year closing price (dash on blue bar)
• Displays AFG’s default intrinsic value (red dotted line)
How to Read this chart:
• The Blue Bars represent the high and low trading range for a stock for each calendar year.
• The red dotted line represents Applied Finance Group’s (AFG’s) historical Intrinsic Value through time.
• When the red line (Intrinsic Value) is above the blue bars (trading range) the company looks to be undervalued.
• When the red line (Intrinsic Value) is below the blue bars (trading range) the company looks to be overvalued.
Below is an example of AFG’s Intrinsic Value Chart and the important things to look for within the chart as well as two examples of undervalued companies according to AFG’s Intrinsic Value Chart as well as two overvalued and two fairly valued examples to provide a better understanding of what to look for when analyzing AFG’s Intrinsic Value Chart.