VALUATION from a Strategic Perspective: Improving Investment Decisions

Chapter 16 from Competition Demystified

By now you realize that you need to focus most of your attention as an investor on understanding the particular business, the industry and the competitive interactions within an industry before plugging inputs into whatever valuation model you use. Seek first to understand then value. Often Wall Street places the cart before the horse with its analysts’ projections of earnings and price targets.

After finishing our tour through Competition Demystified, I will ask readers if they want to go deeply into valuation. This chapter gives you a preview of the major issues.

Here are your study questions:

  1. What are the three major shortcomings of using the NPV approach to valuing companies?
  2. In an earnings power calculation, what are the six (6) adjustments you need to make to the current cash flow to arrive at an accurate estimate?
  3. What are the two ways to value a company’s assets?
  4. The difference between the asset value and the earnings power value is evidence of what?

For those who want a thorough review of valuation case studies from this blog, here they are. If you go through these carefully, you will have the foundation of an MBA course on valuation.


Greenwald VI Process Foundation_Final

Greenwald_2005_Inv_Process_Pres_Gabelli in London


Sealed Air 1998 10-K


Sealed Air Case Study_Handout

 Hudson General Valuation

Hudson General Case Study_Read this First

Valuing Hudson General and Analysis

Liz Claiborne

Greenwald Class Notes 5 – Liz Claiborne & Valuing Growth(2)

See you at the end of this week!

12 responses to “VALUATION from a Strategic Perspective: Improving Investment Decisions

  1. Hey John,
    Where can I find the answers to all these interesting question you raised?

  2. Dear John,

    First of all, thank you for a wonderful blog.
    I would like to start learning, but the problem is where is the beginning of this blog? :))

    • Go to the search function and type in Sept. 9, 2012 and you will reach the first post then go through all the posts and do the readings and cases–should take you three years. Also ask for key to value vault and see the videos and do the readings email first blog post here:

      In only 10 to 12 years of daily work, 15 hours a day 6 days a week, you will become an expert investor. I am still a beginner but have been at it 20 years.

  3. haha John. 🙂

    About your question in the Sequoia discussion of Autozone, O’reilly, and Advance, “what is the source of their double digit return on capital”, the answer if there on page 7, but more detail is provided in the letter by the chairmen of the companies in the ARs.

    They have a Walmart type distribution network with hubs (which carry twice the inventory and act as distribution centers and supply the shops several times a day) and shops. They understand what business they are really in: Not just parts. Maximum availability.
    Biologically inspired. People buy from them instead of online because they can get it Now. No delay. Drive there and you know you have it (or that’s the idea).

    • Great that you went the extra mile to discover for yourself. Have these on your radar to some day pick up on the cheap or to find a similar model in another business. All learning is interconnected and useful.

      Thanks for the post.

  4. Those question are very helpful for all new investors to improve their decision,in world of business if you don’t know if your are ready they is a possibility to failed and you will take a lot of risk which is very bad thank for this.

  5. John,

    I was wondering if you could give us a little more color on Prof. Greenwald’s adjustment to ROIC for Liz Claiborne (pasted below). Also, could you please comment on other less obvious adjustments one ought to make to ROIC (except for operating leases for example)?

    Thanks in advance. Your blog is an invaluable resource.

    The ROIC and ROE are not including the full value of the brands (off-the-balancesheet). If I include the brand value, then the ROE is below 10%.
    Where did that brand value come from if it did not come from invested capital?
    There were clothing companies that started out to be Liz Claiborne’s that are no longer with us. Then there were companies that started out to be Liz Clairborne and then succeeded unexpectedly well. This is one of those surviving Liz Claiborne’s. (Survivor Bias). So fortuitous history will improve the balance sheet without particular investments that are identified with those assets.”

    • Dear Mike:

      Let me get an hour to review the info once I get a little open field. I hope to be back to you Monday.

      Remember brands are assets that are bought and/or invested in/deveoped over time. Brand by themselves are not a competitive advantage.

      Let me review and reply. Thanks.

  6. john,
    are there any Greenwald valuation case studies on banks? thanks


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