ORGANIC GROWTH INDEX “OGI” (1996 – 2006) Edward D. Hess 2/24/2008.
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Transcript of ORGANIC GROWTH INDEX “OGI” (1996 – 2006) Edward D. Hess 2/24/2008.
ORGANIC GROWTH INDEX“OGI”
(1996 – 2006)
Edward D. Hess2/24/2008
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.
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Background
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.
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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.
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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
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
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Prior Results
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.
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The OGI Model was applied to three new time periods:
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New Results
1999 – 20042000 – 20052001 - 2006
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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
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
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NEW RESULTS
72 Winners (in at least two time periods)
98 – 03 99 – 04 00 – 05 01 – 06
68% 70% 69% 68%
63% 68% 69% 77%
70% 73% 80% 63%
87% 88% 91% 98%
77% 84% 82% 87%
7% 10% 11% 11%
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Test 96-01 97-02
Growth Tests 57% 63%
Core Earning Test 71% 56%
AR/Sales Test 77% 65%
Cash Realization Test 94% 90%
M&A Test 78% 76%
Final Sample
(% of Beginning Sample)
8% 5%
Test Passing 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%
Cash Realization Test 6% 10% 13% 12% 9% 2%
M&A Test 22% 24% 23% 16% 18% 13%
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Test Failure Rates
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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%
Retail 24% 32% 27% 21% 18% 24%
Healthcare 6% 9% 12% 10% 6% 12%
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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
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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
1996-2006
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27 ALL STARS
Stock Returns Comparisons
With Dividends
WithoutDividends
DJIA S&P 500NASDAQ
100
27 All Stars
1996-2006 1481.44% 1368.82% 143.56% 130.27% 204.90%
27 ALL STARS
13 Retail or Restaurant Chains
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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
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27 ALL STARS
Gross Revenue Average (in Millions): $12,119
Highest Revenues (in Millions) Lowest Revenues (in Millions)
Walgreen 47,409
CoPart 529
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
American Eagle Outfitters 27,940 AptarGroup 1,601
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27 ALL STARS
Market Cap. Average:
Market Cap. < 2B:
Market Cap. 2-10B:
Market Cap. > 10B:
9.72B
3 companies
14 companies
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
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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
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24 ALL STARS(Excluding Applebee’s, OSI, and Dollar General)
Average CEO Years with Company:
CEOs with MBA Degree:
CEOs with Law Degree:
Average CEO Compensation (in Millions):
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3
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$5.75
Highest Compensation (in Millions) 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)
Company 96 – 01 97 – 02 98 – 03 99 – 04 00 – 05 01 – 06
Abercrombie Fitch
Coldwater Creek
CoPart
Chicos
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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
Sonic
TJX
Terex V V V
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What Changed?
V = Winner
Company 96 – 01 97 – 02 98 – 03 99 – 04 00 – 05 01 – 06
JM Smucker
Ethan Allen
EOG
ADP
Gentex
Harley-Davison
Mylan Labs
Omnicom
Ruby Tuesday
Stryker
Wal-Mart
Waters
Autozone
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What Happened?
V=Winner