Alfred Rappaport 7 Value Drivers

• Investors can earn superior returns by reading the price-implied expectations in stock prices and correctly anticipating revisions in those expectations. • provides the tools investors need to read expectations and anticipate revisions of those expectations by manipulating the traditional discounted cash flow model, and by bridging the gap between valuation and competitive strategy. Overview and Thoughts:, provides investors with a fantastic framework upon which to make critical investing decisions. The book is a quick read, and the core concepts are relatively straightforward to apply, especially for investors with previous valuation experience.

Shareholder value creation process can also be under- stood as [7]: • modern. Alfred Rappaport [10], suggested seven value drivers within a business that can.

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It’s critical today to be able to understand what expectations are embedded in a stock’s current price (what’s priced in?), and this book provides a useful set of tools to estimate these price implied expectations. One question I always ask in my personal investing process is, how does the market view my target? Expectations Investing also bridges valuation (through the expectations investing framework) with competitive strategy analysis and the evaluation of management decisions. Part 1: Gathering the Tools Chapter 1: The Case For Expectations Investing The authors argue that investors can achieve superior returns by reading the expectations that are currently embedded in the price of a stock, and correctly anticipating revisions in those expectations through competitive strategy analysis, and by reading management signals. Active investors have underperformed for a variety of reasons including but not limited to: costs, incentives, style limitations, and ineffective tools. The expectations framework doesn’t distinguish between styles like growth or value, leads investors to reduce the number of trades they make, and provides them with the correct tools they need to succeed.

Here are the three steps in the expectations investing process: • Estimate price-implied expectations (using a reverse DCF model) • Identify expectations opportunities (where the company is most sensitive to revisions in expectations, ie. Sales, costs, investments) • Make a buy, hold, or sell decision Chapter 2: How the Market Values Stocks Research shows that despite popular belief that the market is short-term, it actually values stocks based on the magnitude, timing, and riskiness of long-term expected cash flows.

Lee ritenour on the line rar. In order to understand what expectations are implied in a stock price, investors need to understand a few key concepts: • How to get from a company’s financial statements to free cash flow • The time value of money and the relationship between discounting and compounding (here’s a cool visual from ) • Traditional DCF analysis The expectations investing framework uses the future free cash flow performance implied by the stock price as a benchmark for decision making. The author’s argue (and I would agree) that this is a lot more useful than either struggling to forecast these future cash flows, or using poor short-term valuation proxies like P/E ratio’s. Chapter 3: The Expectations Infrastructure In order to correctly anticipate revisions in expectations, investors need to understand the framework of what drives shareholder value. The author’s detail the relationship between value drivers, (influenced by) value factors, (influenced by) and value triggers. The three main triggers are sales, costs efficiencies, and investment efficiencies, and you can determine the influence that changes in each of these areas will have on the price of a stock by tinkering with them in your model.

Investors should focus on the area with the largest expectations revision potential, which is usually sales.

Executive Summary Reprint: R0609C Executives have developed tunnel vision in their pursuit of shareholder value, focusing on short-term performance at the expense of investing in long-term growth. It’s time to broaden that perspective and begin shaping business strategies in light of the competitive landscape, not the shareholder list. In this article, Alfred Rappaport offers ten basic principles to help executives create lasting shareholder value. For starters, companies should not manage earnings or provide earnings guidance; those that fail to embrace this first principle of shareholder value will almost certainly be unable to follow the rest. Additionally, leaders should make strategic decisions and acquisitions and carry assets that maximize expected value, even if near-term earnings are negatively affected as a result. During times when there are no credible value-creating opportunities to invest in the business, companies should avoid using excess cash to make investments that look good on the surface but might end up destroying value, such as ill-advised, overpriced acquisitions.