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Value Creators Report 2003
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Value Creators Report
Back to Fundamentals
December 2003
A Repor t by The Bos ton Consu l t ing Group
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Table of Contents
ACKNOWLEDGEMENTS 4
FOREWORD 5
EXECUTIVE SUMMARY 7
FUNDAMENTALS ONCE AGAIN DRIVE TSR 9
KEY INGREDIENTS FOR SUCCESS 17
Overview of the core principles of value creation 17
Profitability above the cost of capital is critical 19
Growth makes the biggest contribution to TSR 28
The importance of relative expectation premiums 33
A note on dividends 37
CEO CHECKLIST 38
REGIONAL AND INDUSTRY RANKINGS 41
APPENDICES 78
Technical notes 78
How BCG can help 84
BCG contact details 88
4
Acknowledgements
Dr. Daniel Stelter, a vice president based in Berlin, Germany, leads BCG's worldwide Corporate Finance &Strategy practice. Dr. Stelter initiated this report and the analysis the report is based on (e-mail address:[email protected]).
Dr. Pascal Xhonneux, a vice president based in Düsseldorf, Germany, is head of BCG's Corporate Finance &Strategy practice in Germany. He was responsible for the project team's conducting the analysis and completing thereport (e-mail address: [email protected]).
His co-authors include:
Mr. Mark Joiner, a senior vice president based in New York, who leads BCG's Merger & Acquisition and CorporateFinance expertise worldwide (e-mail address: [email protected])
Mr. Eric Olsen, a senior vice president based in Chicago, who leads BCG's Value Management expertise world-wide (e-mail address: [email protected])
Mr. Gerry Hansell, a vice president based in Chicago, who heads BCG's Corporate Finance & Strategy Practicein the U.S. (e-mail address: [email protected])
Mr. Brad Banducci, a vice president based in Sydney, who heads BCG's Corporate Finance & Strategy Practice inthe Asia Pacific region (e-mail address: [email protected])
The authors would like to thank Ms. Kerstin Biernath and Mr. Martin Link, both research analysts, as well as Dr. FrankJ. Plaschke, a project leader in BCG's Munich office, who helped create the framework for the analysis and con-ducted the research.
The Corporate Finance & Strategy Practice at BCGThe Boston Consulting Group's Corporate Finance & Strategy practice (CFS), with its dedicated experts, serves com-panies in developing, realizing, and maintaining superior strategies for long-term value creation.
Sustaining long-term value creation—as the overall goal of any strategy—demands thorough understanding of ourclients' businesses and relevant markets. In cooperation with our industry experts, we develop industry- and client-specific strategies using our broad set of proven methodologies: from portfolio analyses to value managementframeworks to M&A and PMI operational guides.
When a defined strategy requires capital market transactions, our Corporate Finance experts work as independent,trusted advisors to our clients. Our support is not solely focused on the transaction process: we also concentrate onthe transaction's value with respect to its impact on and fit with the strategy.
Such a move can only be realized when integration into the newly created company goes smoothly. With our broad,proven experience in post-merger integration, we are a well-known partner for companies worldwide when it comesto realizing the full value of M&A transactions.
With our consultants, analysts, and researchers worldwide, we maintain a global network of corporate finance andstrategy experts to best serve our clients' needs.
ACKNOWLEDGEMENTS
Layout & Design: Ellen Treml, Titelbild copyright: Ellen Treml
5
As we have consistently demonstrated in previous editions of our annual Value Creators Report, now in its sixth year,strong improvements in fundamentals are a prerequisite for sustaining superior shareholder returns: in the long runexpectation premiums—the difference between market and fundamental values—vanish, leaving just fundamentalsto "keep the show on the road." In short, firms control their stock market destinies. This year's report vindicates thisview more firmly than ever before.
In line with our forecasts in earlier reports, which often ran against the grain of popular thinking, especially duringthe "bubble years," average expectation premiums have continued to decline towards zero in most regions and indus-tries over the last two years. Nearly all of today's top value creators, measured by total shareholder returns (TSR),now owe their success to strong fundamentals. Moreover, this long-overdue return to fundamentals wasn't simply dueto a fall in expectation premiums but to an improvement in the key fundamental drivers of value creation: cash flowreturn on investment (CFROI) and profitable investment growth.
More specifically, the world's top value creators pulled the right levers at the right time. Although investment growthis the strongest driver of shareholder returns, as BCG's Corporate Finance & Strategy practice has demonstrated,companies should only pursue growth once profitability, measured by CFROI, is above the weighted average costof capital. Equally importantly, firms need to align their strategies with their core investors' expectations to ensure fun-damentals translate into shareholder value: "internal" intrinsic value creation has to be linked to "external" capitalmarket value creation.
This year's Value Creators Report highlights the key ingredients for generating and sustaining above-average TSR,based on analysis of over 4,000 listed corporations across the globe, plus case studies of individual companies. Atits heart is a detailed analysis of the core principles of fundamental value creation required to achieve superior share-holder returns. Over the last five years many firms have relied on high expectation premiums rather than strong fun-damentals to deliver shareholder value. Now that these premiums are declining, as our historical analysis indicatedthey would, smart companies will re-focus on managing their fundamental value-creation drivers
Foreword
FOREWORD
6
7
Fundamentals, not investors' expectations, areonce again driving total shareholder returns(TSR), leading to a significant change in thecomposition of the world's top value creators.
Between 1999 and 2002, fundamentals as a propor-tion of market value for our total sample rose from 49%to 77%. The increase among the top 10 TSR firms waseven more pronounced: 24% to 73%. However, thiswasn't simply due to a decline in the high expectationpremiums (the difference between market and funda-mental values) that characterized the stock market bub-ble of the late 1990s; it also reflects strong long-termimprovements in the leading companies' fundamentalperformances. Since 1999 the world's top 10 corpora-tions have increased their fundamental or "intrinsic"value by 25% a year on average. Similar trends are evi-dent in all regions and industries. This return to funda-mentals has substantially changed the composition ofthe world's top value creators. For example, only one ofthe "bubble period" companies remains in the topdecile today, while the balance of industries in thisdecile has shifted away from technology to a more rep-resentative cross-section, including more mature sec-tors such as utilities and automotive.
North America generated the biggest improve-ments in fundamentals during the periodbetween 1999 and 2002, followed by Asia, andthen Europe. The most fundamentally successfulindustry was pharmaceuticals.
Companies in North America improved their intrinsicvalue by 8% a year on average between 1999 and2002, compared to 6% in Asia, and 4% in Europe. Infact, the ten most successful firms in the world were allU.S.-based. In terms of industries, pharmaceuticals led
the way with an annual 12.2% rise in fundamentals,while retail weighed in with 9.8%, and pulp and paperwith 9.2%. Insurance brought up the rear with an 8.9%drop in its intrinsic value. Nevertheless, in this sector aswell as in the other ten industries analyzed, several cor-porations achieved substantial fundamental growthand shareholder returns well above the global average,demonstrating that superior value creation is possiblein all sectors.
Profitability above the cost of capital is one ofthe hallmarks of a top value creator. Moreover,these players push for increasingly high prof-itability.
A total of 81% of the top-decile TSR companiesachieved profitability above the cost of capital, com-pared to just 19% of firms in the bottom decile. Ouranalysis also reveals that companies and industries withthe highest profitability—measured by cash flow returnon investment (CFROI)—tend to have the highestinvestment growth, which is the biggest driver of share-holder returns. To lift profitability, the world's top valuecreators tend to increase both asset productivity andcash flow margins, although the emphasis on eachlever varies amongst industries. For example, utilities,pharmaceuticals, and technology relied heavily onincreasing cash flow margins, while retail, consumergoods, and automotive depended more on improvingasset productivity.
Profitable investment growth is the biggest driv-er of TSR.
Profitable investment growth accounts for around 70%of TSR. The importance of growth for superior share-
Executive Summary
EXECUTIVE SUMMARY
8
Executive Summary
holder returns was underlined by the fact that 80% ofthe top-decile value creators increased their investmentbase substantially, compared to just 21% of the totalsample of companies.
Few firms sustain above-average shareholderreturns for more than a few years. However amore holistic approach to value creation—onethat aligns firms' fundamental value-creationstrategies with their core investors' expecta-tions—can help companies overcome this prob-lem.
Less than 25% of the 1,675 firms analyzed1 beat theirlocal market indices for more than six years out of tenand only 13 companies outperformed their indices fornine out of ten years. Managing business units as a
portfolio of value creators and destroyers is a key steptowards resolving this issue. This enables companies tofocus units and capital on markets with the greatestvalue-creation potential, while shedding those with lit-tle or no competitive advantage in the future. All unitsshould be controlled with two main drivers of value cre-ation: profitability—as measured by CFROI, and prof-itable growth, with investment growth only pursuedonce profitability is above the cost of capital. Equallycritically, strategies to improve fundamentals, includingportfolio management, should be aligned with firms'core investors' expectations, including their riskappetite, dividend policies, and other aspirations.Research done in conjunction with Thomson Financialhas shown that corporations that do this are less likelyto be incorrectly valued and experience all the prob-lems this can entail—problems many firms have recent-ly encountered.
1 Analysis includes 1,675 companies that had a minimum market capitalization above $1 billion as of 31 December 2002 and were listed for more than ten years.
9
An historical reminder of the long-term impor-tance of intrinsic value.
As we showed in our previous two editions of our ValueCreators Report, expectation premiums are aninevitable feature of the world's capital markets in theshort to medium term, but in the long run they declinetowards zero (Fig. 1). In short, fundamentals drive long-term shareholder returns. After the longest running bullmarket in history, which saw expectation premiumsreach record highs in 1999 thereby accounting for 76%of the top 10 TSR players' stock market values, this
basic principle of value creation is re-asserting itself, aswe demonstrate below.
Expectation premiums fall, bringing stock pricescloser to intrinsic value …
● Worldwide: Between 1999 and 2002, expecta-tion premiums as a proportion of market value forour total sample declined steadily each year, from51% to 23%. The drop in premiums among thetop 10 value creators (measured by TSR) was
FUNDAMENTALS ONCE AGAIN DRIVE TSR
The days of relying on expectation premiums—the difference between market and fundamen-tal values—to fuel total shareholder returns (TSR) are over. As expectation premiums declinetowards their long-term market average of zero, only firms with strong fundamentals are ableto achieve superior returns.
Fundamentals Once Again Drive TSR
(1) Estimated fundamental value based on forecasted EBITDA Basis: 1950–2002: 376 companies excluding financial institutions and P/E Corp Bio Systems; 1926–1949: 40 companies taken from Moody's Manual of InvestmentsSource: Moody's Manual of Investments; Value Management Research Engine; BCG analysis
Private sectorinvests increasingly in the equity market
Market
Market value
200
EEXXPPEECCTTAATTIIOONN PPRREEMMIIUUMMSS SSHHOOWW SSTTRROONNGG OOSSCCIILLLLAATTIIOONNSS OOVVEERR TTIIMMEE
LONG-TERM ANALYSIS OF THE S&P 400 BETWEEN 1926 AND 2003
Fundamental value
180
160
140
120
100
80
60
40
20
0
High
Low
Average
268%
210%
1926 1930 1935 1940 1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 Oct.2003(1)
"WW II"
"Tronics boom" Oil crisis
"New Economy" boom
High:Sept. 1987
EExxppeeccttaattiioonn pprreemmiiuumm >> 00
Figure 1
10
Fundamentals Once Again Drive TSR
Figure 2
(1) Weighted average; 274 companies; minimum market value 2002: $10B(2) Companies with highest total shareholder return p.a. 1998–2002; weighted average (3) Market value of equity plus interest bearing debt, 1997 = 100(4) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003Source: BCG analysis
Company value index (3)
FFUUNNDDAAMMEENNTTAALL VVAALLUUEE AANNDD EEXXPPEECCTTAATTIIOONN PPRREEMMIIUUMM OOVVEERR TTIIMMEE
Total sample (1)
1997
37%
100
1998 1999 2000 2001 2002 2003(4)
46%51% 43% 38% 23% 25%
129171 174 161
131 141
Expectation premium Fundamental value
Top 10 TSR companies (2)
63% 54% 49% 57% 62% 77% 75%
1997
16%
100
1998 1999 2000 2001 2002 2003(4)
39%
76% 65%
57% 27% 33%
189
690 665
532
439477
Expectation premium Fundamental value
84%61%
24%35% 43%
73% 67%
Company value index (3)
WORLD
Figure 3
(1) Weighted average; 94 companies; minimum market value 2002: $5B(2) Companies with highest total shareholder return p.a. 1998–2002; weighted average (3) Market value of equity plus interest-bearing debt, 1997 = 100Source: BCG analysis
FFUUNNDDAAMMEENNTTAALL VVAALLUUEE AANNDD EEXXPPEECCTTAATTIIOONN PPRREEMMIIUUMM OOVVEERR TTIIMMEE
Total region (1)
1997
23%
100
1999 2002
33% 2%
12198
Expectation premium Fundamental value
Top 10 TSR companies (2)
77% 67% 98%+3% +6%
CAGR
ASIA-PACIFIC
+31% -67%
1997
18%
100
1999 2002
44%
10%217
261
Expectation premium Fundamental value
82%56%
90%
+22%
+25%
CAGR
-35%
+129%
Company value index (3) Company value index (3)
Note: CAGR = compound annual growth rate
11
Fundamentals Once Again Drive TSR
even more pronounced, plummeting from 76% to27% (reflected in Fig. 2).
● By region: Expectation premiums fell in allregions over this period, with Asia experiencingthe largest drop (Fig. 3), followed by Europe (Fig.4). Although North America's premiums alsodecreased (Fig. 5), they remained relatively highamong the top 10 TSR performers by the end of2002 (48%).
● By industry: All industries also experienced adrop in expectation premiums. Three of these(pulp and paper, travel, transport and tourism,and utilities) now have negative premiums, indi-cating that the market might have overreacted tothe previously high premiums—an historicallycommon occurrence discussed in last year's ValueCreators Report. Three sectors still have marketvalues significantly higher than their intrinsic val-ues: pharmaceuticals, retail, and consumergoods (Fig. 6).
● Outlook for 2003 and beyond: Although anyforecasts should be tempered with the usualcaveats, a slight lift in expectation premiums incertain regions and industries in the first ninemonths of 2003, notably in Asia and amongNorth America's top value creators, suggests thatU.S. investor optimism might be spreading morewidely. Whether this will be sustained, given thatmarket and intrinsic values tend to converge in thelong run, we will have to wait and see.
… while fundamentals grow strongly among thetop performers.
The increase in intrinsic value as a proportion of mar-ket value, evident in Figures 2–5, isn't simply due to thegeneral decline in investors' expectations, it also reflectsstrong long-term fundamental performances amongthe world's top value creators. In most cases, the topTSR companies' fundamentals grew much more rapidly
Figure 4
(1) Weighted average; 111 companies; minimum market value 2002: $7.5B(2) Companies with highest total shareholder return p.a. 1998–2002; weighted average (3) Market value of equity plus interest bearing debt, 1997 = 100Source: BCG analysis
FFUUNNDDAAMMEENNTTAALL VVAALLUUEE AANNDD EEXXPPEECCTTAATTIIOONN PPRREEMMIIUUMM OOVVEERR TTIIMMEE
Total region (1) Top 10 TSR companies (2)
EUROPE
1997
25%
100
1999 2002
43%12%
191
138
Expectation premium Fundamental value
75%57% 88%
+20% +4%
CAGR
+83%
-42%
1997
24%
100
1999 2002
65% 29%
337
277
Expectation premium Fundamental value
76%35%
71%
+25%
+19%
CAGR
-29%
+199%
Company value index (3) Company value index (3)
Note: CAGR = compound annual growth rate
12
Fundamentals Once Again Drive TSR
Figure 5
(1) Weighted average; 146 companies; minimum market value 2002: $10B(2) Companies with highest total shareholder return p.a. 1998–2002; weighted average (3) Market value of equity plus interest-bearing debt, 1997 = 100Source: BCG analysis
FFUUNNDDAAMMEENNTTAALL VVAALLUUEE AANNDD EEXXPPEECCTTAATTIIOONN PPRREEMMIIUUMM OOVVEERR TTIIMMEE
Total region (1) Top 10 TSR companies (2)
NORTH AMERICA
1997
47%
100
1999 2002
57% 32%
172137
Expectation premium Fundamental value
53% 43% 68%
CAGR
1997
33%
100
1999 2002
79%
48%
589
388
67%21%
52%
-26%
+275%
Company value index (3) Company value index (3)
+17%
+45%
+8%
-23%
+37%+18%
Note: CAGR = compound annual growth rate
Expectation premium Fundamental value CAGR
Figure 6
EEXXPPEECCTTAATTIIOONN PPRREEMMIIUUMMSS BBYY IINNDDUUSSTTRRYY
(1) Weighted average of total sample(2) Based on an estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003Source: BCG analysis
Industry (1) 2001
BanksConsumer goodsRetailMedia & entertainmentPharmaceuticals & biotechTechnologyChemicalsMultibusinessInsuranceIndustrial goods, engineering & raw materialsAutomotive & supplyPulp & paperTravel, transport & tourismUtilities
Fundamental valueExpectation premium
2002 2003(2)
45%
46%
51%
55%
54%
49%
34%
42%
43%
66%
58%
57%
24%
37%
39%
76%
63%
61%
20%
15%
0%
80%
85%
100%
5%
-13%
95%
113%
40% 60%
40% 60%
35% 65%
25% 75%
24% 76%
22% 78%
19% 81%
19% 81%
12% 88%
8% 92%
-10% 110%
-11% 111%
-24% 124%
17% 83%
41% 59%
37% 63%
37% 63%
24% 76%
19% 81%
26% 74%
20% 80%
24% 76%
24% 76%
18% 82%
12% 88%
-5% 105%
-3% 103%
-21% 121%
13
Fundamentals Once Again Drive TSR
than their local market or industry averages, often by afactor of three or four.
Although the recent global economic slowdown hastaken some of the steam out of their growth (anddampened investor confidence), the top TSR playershave nevertheless produced impressive results since1999. Typically they increased their intrinsic value byaround 25% a year, demonstrating that strong per-formances are possible in all conditions.
● Worldwide: The intrinsic value of all companiesin our sample grew by 6% per year during1999–2002, compared to 16% per year in1997–1999. As Figure 2 illustrates, the world'stop 10 TSR generators increased their fundamen-tals by 25% a year on average between 1999 and2002, over four times faster than the average forour total sample.
● By region: On average firms in North Americaincreased their intrinsic value by 8% a year during1999–2002, compared to 6% in Asia and 4% in
Europe. However this ranking is reversed if onlythe top 10 TSR players in each are considered:Asia Pacific's top 10 performers recorded thebiggest increase (25% annually), followed byEurope (19%), and North America (18%). Thiscan be seen in the right-hand panels of Figures3–5.
● By industry: Since the end of the stock marketbubble, "old economy" sectors have tended togenerate the largest improvements in fundamen-tals (Fig. 7). The top industries were pharmaceuti-cals (12.2% fundamental growth per year), retail(9.8%), media (9.2%), and pulp and paper(9.2%). The weakest sectors were insurance (-8.9%), technology (3.1%), and chemicals(3.3%). However these figures conceal powerfulperformances from individual firms as we discussbelow.
● Impact on composition of top value cre-ators: During 1997–1999, when expectationpremiums were rising steadily and driving share-holder returns, 70% of the top-decile value cre-
Figure 7
(1) CAGR 1999–2002 of total sample per industrySource: BCG analysis
PPOOSSTT--BBUUBBBBLLEE DDEEVVEELLOOPPMMEENNTT OOFF EEXXPPEECCTTAATTIIOONN PPRREEMMIIUUMMSS AANNDD FFUUNNDDAAMMEENNTTAALL VVAALLUUEE BBYY IINNDDUUSSTTRRYY ((11999999––22000022))
Industry CAGR of fundamental value (1)
TOTAL SAMPLE BY INDUSTRY
Insignificant
Pharma & biotechRetailMedia & entertainmentPulp & paperUtilitiesInd. goods, engineering & raw materialsAutomotiveConsumer goodsMultibusinessBanksTravel & tourismChemicalsTechnologyInsurance
CAGR of expectation premium (1)
InsignificantInsignificant
12.2%9.8%
9.2%9.2%
8.6%8.2%
7.8%7.7%7.6%
5.6%3.6%3.3%
3.1%
-8.9%
-19.6%
-24.5%-23.4%
-22.4%-26.5%
-11.4%
-34.2%-10.3%
-24.4%-45.2%
-24.0%
Note: CAGR = compound annual growth rate
Fundamentals Once Again Drive TSR
ators were technology companies, with retail andmedia accounting for the rest. Today, thanks tothe "return of fundamentals," the balance is moreevenly balanced spread between eight industries(Fig. 8). Moreover, only one of the companiesmanaged to be in the top TSR decile in the1997–1999 as well as in the 1999–2002 period.
Significant improvements in fundamentals arepossible in all industries.
In every industry there were companies whose valuecreation measured as TSR were significantly above boththe world average (5% TSR annually over the period
1998–2002) and the average of every other industry. Inthe travel and tourism sector, for example, which hadthe lowest annual average TSR (1%), the top playerachieved 66% TSR-higher than the average of the mostsuccessful industry, pharmaceuticals (7%), and abovethe leading players in several other sectors, includingmedia (Fig. 9).
Similarly, significant improvements in fundamentalsmeasured as TBR are possible in every industry(Fig. 10). During 1998–2002, the top 3 sectors byaverage annual TBR were Retail (14% TBR annually),consumer goods (12%), and pharmaceutical (11%).
Figure 8
Echostar as only company being a top performer in 1997–1999 1999–2002and
Source: BCG analysis
DDUURRIINNGG BBUUBBBBLLEE--PPEERRIIOODD TTOOPP PPEERRFFOORRMMEERRSS MMAAIINNLLYY DDRRIIVVEENN BBYY EEXXPPEECCTTAATTIIOONN PPRREEMMIIUUMMSS
Top decile TSR performers 1997–1999 Top decile TSR performers 1999–2002
AFTER BUBBLE-PERIOD TOP PERFORMERS WITH SOLID FUNDAMENTALS AND SUSTAINED EXPECTATIONS
1997
48%
100
1998 1999
33%
69%207
504
Expectation premium Fundamental value
52%
67%31%
CAGR
Company value index
73%
170%
1999
20%
100
Expectation premium Fundamental value
80%
Company value index
14%
2%
2000 2001 2002
30% 23% 21%130 136 143
70% 77% 79%
25%
20%20%
15%
Utilities
Pharmaceuticals
Consumer goods
Industrial goods
RetailMedia
Automotive
70%20%
10%
TechnologyRetail
Media
CAGR
Note: CAGR = compound annual growth rate
14
15
Fundamentals Once Again Drive TSR
Figure 9
Source: Thomson Financial Worldscope; BCG analysis
51
23
60
31
44
19
58
20
71
56
78
66
-12 -14-21
-14 -13-17 -17
-25-20 -22
-30-24
7 7 6 5 5 4 3 3 3 2 2 1
HHIIGGHH,, LLOOWW AANNDD MMEEDDIIAANN TTSSRR PPEERR IINNDDUUSSTTRRYY
80
60
40
20
0
-20
-40
TSR p.a. 1998–2002 (%)
Figure 10
HHIIGGHH,, LLOOWW AANNDD MMEEDDIIAANN TTBBRR PPEERR IINNDDUUSSTTRRYY
Source: BCG analysis
Retail Consumergoods
Pharma &biotech
Industrialgoods
Media Automotive Multi-business
Pulp &paper
Chemicals Utilities Technology Travel &tourism
TBR p.a. 1998–2002 (%)
41
31 3229
23
36
2527 26 26
37
28
-12-8
-5
-11
-6-8 -7
-4-7 -7
-14
-10
1412 11 11 10 9 8 8 7 7 7 5
50
40
30
20
10
0
-10
-20
Few companies, however, sustain above-aver-age TSR for more than a few years.
Less than 25% of the 1,675 firms analyzed2 beat theirlocal market indices for more than six out of ten yearsand only 13 companies outperformed their indices fornine out of ten years. None sustained above-average
TSR for ten years (Fig. 11). This was despite the fact thatmany companies achieved long-term improvements intheir fundamentals, suggesting a disconnect betweeninternal value creation and the capital markets. In mostcases, however, it was a reflection of firms' inability tomaintain fundamental growth in the face of competitivepressures.
Fundamentals Once Again Drive TSR
Figure 11
Number of years in which they beat the local market (1)
Number of companies
(1) Relative total shareholder return (RTSR) = company TSR vs. local total market index, between 1993 and 2002 Note: Analysis includes 1,675 companies that had a minimum market capitalization above $1B as of 31/12/2002 and were listed for more than ten yearsSource: Thomson Financial Worldscope; BCG analysis
CCRREEAATTIINNGG VVAALLUUEE YYEEAARR AAFFTTEERR YYEEAARR IISS AA DDIIFFFFIICCUULLTT TTAASSKK
0
0
1 2 3 4 5 6 7 8 9
233
127
277
479
402
243
99
13
10
0
16
2 Analysis includes 1,675 companies that had a minimum market capitalization above $1 billion as of 31 December 2002 and were listed for more than ten years.
17
18
Key Ingredients for Success
Use appropriate measures to gauge and controlinternal value creation.
One of the most commonly used measures is EBITDA.However, as we explained in last year's report, it canproduce misleading signals due to its omission of bal-ance-sheet-related items, such as depreciation of fixedassets. More suitable alternatives are Total BusinessReturns (TBR) and "Cash Value Added" (CVA). Bothratios do not suffer from EBITDA's pitfalls and both havea strong relationship with TSR. Moreover, CVA can bedisaggregated into a value-driver tree of practicalmeasures, beginning with cash flow return on invest-ment (CFROI) and its appropriate value levers, cashflow margin and capital turnover, as well as profitablegrowth in terms of gross investment increase.Additionally, these measures can be broken down fur-ther into operational value drivers for each businessunit providing insight into how value is created in dif-ferent areas and levels of responsibility throughout acompany.
Ensure profitability is above the weighted aver-age cost of capital before increasing grossinvestment.
There are two ways to generate value, measured byimprovements in TBR or Cash Value Added (CVA): by
increasing CFROI or by growing gross investment base.Investment growth will only produce value if profitabili-ty is above the weighted average cost of capital;unprofitable growth will destroy value (Fig. 12). As wediscuss later, there are exceptions to this "rule," notablycorporations that need to grow unprofitably in order toachieve competitive scale. But these instances arerare—most top value creators adhere to the profitabil-ity principle, as we show.
Manage your business units as a portfolio ofvalue "creators" and "destroyers," aligning yourportfolio with your core investors' expectations.
Business units should not be treated homogenously withcapital allocated democratically between them—acommon pitfall. Instead, the units with the greatestvalue-creation potential relative to their competitivestrengths and markets should be supported and thevalue destroyers restructured or shed. This should be anongoing process in order to respond proactively tocompetitive pressures. Equally crucially, companies'strategies need to be aligned with their dominantinvestors' expectations to ensure fundamentals translateinto shareholder returns. A mismatch between investors'aspirations and fundamentals will suppress value andpossibly lead to an unjustifiably low stock price.
KEY INGREDIENTS FOR SUCCESS
On the following pages we draw out the key ingredients for generating and sustaining supe-rior TSR as derived from a detailed analysis of over 4,000 corporations' fundamentals. Tobring these points to life, we examine several firms in depth. Although these firms are notnecessarily the biggest value creators in their particular industries, their experiences—posi-tive and negative—hold valuable lessons for all companies.
OVERVIEW OF CORE VALUE-CREATION PRINCIPLES
19
Key Ingredients for Success
Strive for constant fundamental improve-ments—value creation is a dynamic process.
Investors expect firms to generate regular improve-ments in fundamentals, not simply to maintain the sta-tus quo. Failure to satisfy this need will lead to subopti-mal shareholder returns. This can be seen in Figure 13,which summarizes the key fundamentals of a major
U.S. consumer goods company. Although the compa-ny's profitability was significantly above the cost of cap-ital, it did not increase its profitability or use its free cashflow "war chest" to fund investment growth. The result—minus 8% TSR. The Indian automotive company HeroHonda, on the other hand, which we discuss in detailon page 31, increased all its fundamentals and reapedthe benefits.
Figure 12
BothRise in profitability
CFROI2
(1) Same principle for banks and insurance companies on an equity basis: CFROI = ROE, GI = equity, CVA = AVENote: CVA = cash value added; AVE = added value to equity; CFROI = cash flow return on investment; ROE = return on equity; GI = gross investment
∆ ∆
HHOOWW CCVVAA IISS CCAALLCCUULLAATTEEDD AANNDD IINNFFLLUUEENNCCEEDD BBYY DDIIFFFFEERREENNTT LLEEVVEERRSS
Profitable growth
It is the dynamic view that counts
CFROI1
Cost of capital
∆ CVA(1)
GI2GI1
CFROI
Cost of capital
GI2GI1
CFROI2
CFROI1
Cost of capital
∆ CVA(1)
GI1, 2
∆ CVA(1)
20
Key Ingredients for Success
A total of 81% of the top-decile TSR companiesachieved profitability above the cost of capital,compared to just 19% of the bottom decile firms.
This dramatic fact can be seen in Figure 14. To reachthis level of profitability, some companies shrunk theirinvestment base, occasionally too aggressively.Others—the exceptions to the rule—generated superi-or shareholder returns despite growing unprofitably asinvestors recognized that these firms needed to investfirst to achieve competitive scale. Below we examinethree companies that typify each of these situations.
● Centrica successfully reduces its capitalbase: When Centrica was demerged from BritishGas in 1997 as part of deregulating the U.K.'sgas market, the company's profitability was lan-guishing below the cost of capital with corre-spondingly low shareholder returns. It knew thatinvestment growth held the key to its long-termsuccess, but it also recognized that it had toimprove its profitability first. The company's solu-tion was to decrease its unprofitable gross invest-ment by reducing its net working capital, notablyits high number of debtors, bringing CFROI clos-er to the cost of capital.
Figure 13
UU..SS.. CCOONNSSUUMMEERR GGOOOODDSS CCOOMMPPAANNYY:: CCFFRROOII AABBOOVVEE CCOOSSTT OOFF CCAAPPIITTAALL BBUUTT SSHHRRIINNKKIINNGG GGRROOSSSS IINNVVEESSTTMMEENNTT
(1) Performance including share price and dividends, end of 1997 = 100(2) Indexed CVA, 1998 = 100Source: Thomson Financial Worldscope; annual reports; BCG analysis
UNDERPERFORMING BUSINESSES SOLD, BUT NO FURTHER GROWTH EXPECTATIONS
Cash flow/sales (%)Cash flow margin
17.8 16.6 16.914.5
16.4
Gross investment index (1998 = 100)
Investment growthIndexed CVA (2)
Internal value creation
CFROI (%)Profitability
17.0 16.8
21.819.6
16.5
Performance index (1)
External value creation (TSR)
79
6268
93100
7986
114
88100
Sales/gross investmentAsset productivity
1.0 1.0
1.3 1.3
1.0
Cost of capital
PROFITABILITY ABOVE THE COST OF CAPITAL IS CRITICAL
21
Key Ingredients for Success
To boost cash flow margins, it also reduced thecost of its retail operations, improved the marginson its service businesses, and lowered its relianceon third-party gas storage, supply, and distribu-tion. Once profitability was above the cost of cap-ital, Centrica was able to increase its gross invest-ment through a string of acquisitions that not onlyconsolidated its position in its core gas and oilmarkets but also helped it expand into other sec-tors such as telecommunications and financialservices. Figure 15 illustrates this strategy, knownas the "C-curve". Together these initiativesincreased Centrica's fundamental value by 23% ayear and generated 15% annual average TSRabove the market index.
● Major chemical company over-zealouslyshrinks: To improve profitability, one major Euro-pean chemical company dramatically reduced itsinvestment base. Although this lifted its profitabil-ity above the cost of capital—with exceptionallyhigh cash flow margins—the company did not useits additional profitability to improve growth in linewith the C-curve principle. As a result, it suffereda -17% annual TSR over the period 1998–2002(Fig. 16).
● Echostar proves to be an exception to theprofitability rule: Businesses entering marketswhere scale is critical often have little choice butto grow unprofitably initially, one of the exceptionsto the C-curve rule. The U.S. direct broadcastsatellite (DBS) TV provider, Echostar, is a case in
Figure 16
Indexed CVA (2)
Cost of capital
EEUURROOPPEEAANN CCHHEEMMIICCAALLSS CCOOMMPPAANNYY::SSIINNCCEE 11999999 IINNCCRREEAASSIINNGG CCFFRROOII AANNDD CCVVAA DDUUEE TTOO SSHHRRIINNKKIINNGG GGRROOSSSS IINNVVEESSTTMMEENNTT
TOO MUCH SHRINKING AND NO GROWTH EXPECTATIONS AS REASON FOR POOR TSR PERFORMANCE
(1) Performance including share price and dividends, end of 1997 = 100(2) Indexed CVA, 1998 = -100Source: Thomson Financial Worldscope; annual reports; BCG analysis
Cash flow/sales (%)Cash flow margin
5.97.4
9.18.2 8.0
Sales/gross investmentAsset productivity
1.3 1.4 1.4
2.0
1.6
Gross investment index (1998 = 100)
Investment growthInternal value creation
CFROI (%)Profitability
7.9
10.612.9
16.312.9
Performance index (1)
External value creation (TSR)
5547
6672
100141
211
136
42
-100
Key Ingredients for Success
Cost of capital
EECCHHOOSSTTAARR:: UUNNTTIILL 22000000 EEXXTTEERRNNAALL VVAALLUUEE CCRREEAATTIIOONN NNOOTT SSUUSSTTAAIINNEEDD BBYY IINNTTRRIINNSSIICC FFUUNNDDAAMMEENNTTAALL PPEERRFFOORRMMAANNCCEE
(1) Performance including share price and dividends, end of 1997 = 100Source: Thomson Financial Worldscope; annual reports; BCG analysis
BUT APPARENTLY EXPECTED PROFITABILITY INCREASE STARTED IN 2000
Cash flow/sales (%)Cash flow margin
-4.3
-10.3-7.5
5.88.1
Sales/gross investmentAsset productivity
0.8 0.81.1
1.3
1.7
Gross investment (M$)Investment growth
CVA (M$)Internal value creation
CFROI (%)Profitability
-3.7-8.2 -8.6
7.3
13.5Performance index (1)
External value creation (TSR)
120
-74
-438-365
-156
2,8813,161
2,3942,014
1,160
Figure 17
Asset productivity (1998–2002)∆ Growth (1998–2002)
Percentage of companies with superior growth rate
Source: BCG analysis
TTOOPP DDEECCIILLEE TTSSRR PPEERRFFOORRMMEERRSS:: SSUUPPEERRIIOORR CCAASSHH FFLLOOWW MMAARRGGIINNSS AANNDD AASSSSEETT PPRROODDUUCCTTIIVVIITTYY
Total sample
18%
Top decile
25%
Total sample
11%
Top decile
25%
Percentage of companies with superior increase in asset productivity
Cash flow margin (1998–2002)∆
Percentage of companies with superior increase in cash flow margin
Total sample
21%
Top decile
80%
Figure 18
22
23
Key Ingredients for Success
point. In 1994 the company was known asEchosphere, the country's largest distributor ofconventional home satellite equipment, but itrealized the future lay with DBS and started invest-ing heavily in this field, a costly exercise both interms of launching satellites and achieving a crit-ical mass of subscribers.
As Figure 17 shows, unprofitable growthdestroyed internal value between 1998 and 2000but as the subscriber base swiftly grew, increasingboth asset productivity and cash flow margins, thecompany's profitability steadily increased, risingabove the cost of capital in 2002, aided byimproved cost control. Throughout this period,investors remained confident that the drive forscale was the right strategy, reflected in highexpectation premiums and 60% annual TSR. Andthis confidence was ultimately justified: during theperiod 1998–2002 Echostar's fundamental valueincreased by 39% a year on average. Today, thecompany is the second biggest player in the DBSmarket in the U.S. with over 8 million subscribers.
The top players tended to rely more heavily onasset productivity than cash flow margins to liftprofitability.
Although the top-decile value creators outperformedthe total sample in terms of both cash flow margins andasset productivity, the key differentiator was their supe-rior asset productivity—one of the hardest, but appar-ently most fruitful, ways to increase profitability (Fig.18). Here we examine how three companies improvedasset productivity and cash flow margins to producesuperior value:
● Morrison highlights the power of asset pro-ductivity: More intensive use of its stores enabledthe U.K. food retailer Morrison to increase itsasset productivity to around 2.6 over the last fiveyears, well above the sector average, giving it thelevel of profitability required to grow gross invest-ment. Expanding its stores' product offerings andintroducing new services such as cafés and gasstations were just two of the routes used to raise
the productivity of its fixed asset base (i.e., highersales per square foot and inventory turns).
In conjunction with creating new stores, thesedevelopments enabled Morrison, which has his-torically focused on the north of England, toincrease its fundamental value by 15% a year onaverage between 1998 and 2002. The stockmarket rewarded this with a 15% annual averageTSR. Now the retailer is poised to accelerate itsgrowth with the proposed acquisition of Safewayin the U.K., a move that would make it a leadingnational player (Fig. 19).
● SK Telecom plays cash flow margin card: Asteady increase in cash flow margins helpedKorea's leading cellular phone service provider,SK Telecom, push its profitability above the cost ofcapital, enabling the firm to generate substantialTSR. Between 1998 and 2002, cash flow marginsrose from 15.8% to 27.6%. This was mainlyachieved through a combination of cost reduc-tions and sales of high-margin mobile internetservices to its 16 million subscribers. Investmentgrowth was relatively modest and asset productiv-ity generally flat. (Fig. 20)
Overall, the company's fundamental value grewby 42% a year, earning it 45% TSR, well above theWorld Technology Index. Today, its intrinsic valueaccounts for nearly 100% of its stock marketvalue, compared to just 13% in 1999.
● Forest Labs employs both profitabilitylevers: The U.S. generic and specialist pharma-ceuticals company, Forest Labs, increased both itsasset productivity and cash flow margins to takeits profitability above cost of capital, earning it anannual average 51% TSR between 1998 and2002
During this time, asset productivity more thandoubled, thanks to new products coming throughthe pipeline and licensing of special compounds,enabling the firm to use its production facilitiesmore efficiently. The fact that the company has itsown salesforce, which markets its products direct-ly to doctors, drug stores, and other customers,
24
Key Ingredients for Success
also played a pivotal role. Cash flow margins inturn more than tripled due to its highly successfulantidepressant, which accounts for 70% of thefirm's business, and the development of new high-margin products.
Over these five years, profitability as measured byCFROI leapt from 8.1% to 61.5%, helping thecompany increase its fundamental value by 78%a year on average (Fig. 21).
The biggest value creators strive for even high-er profitability to fuel investment growth
Although profitability above the cost of capital is a pre-requisite for long-term value creation, top performersdon't stop once they reach this threshold. They strive forhigher and higher profitability in order to fund invest-
ment growth, the biggest driver of value creation (seenext chapter). This is reflected in two analyses:
● As Figure 22 shows, top-decile corporations withhigh profitability tend to achieve higher growthrates than bottom-decile firms with low profitabil-ity. In the technology sector, for example, top-decile companies had on average a CFROI of30.6% and a gross investment growth of 17.4%per year, compared to an average CFROI of 5.8%and an annual 4.2% gross investment growth forthe bottom decile.
● Similarly, the top-performing industries, such asconsumer goods and pharmaceuticals, had high-er profitability and growth than low value-creationsectors, such as utilities and pulp and paper(Fig. 23).
MMOORRRRIISSOONN:: IINNCCRREEAASSEEDD CCVVAA PPRRIIMMAARRIILLYY TTHHRROOUUGGHH FFUURRTTHHEERR IINNCCRREEAASSEEDD AASSSSEETT PPRROODDUUCCTTIIVVIITTYY
GROWTH BY ROLLOUT OF HIGH ASSET PRODUCTIVITY CONCEPT TO NEW STORES
(1) Performance including share price and dividends, end of 1997=100Source: Thomson Financial Worldscope; annual reports; BCG analysis
Cash flow/sales (%)Cash flow margin
14.8
Sales/gross investmentAsset productivity
2.2 2.2
2.6 2.5 2.52.6
Gross investment (M$)Investment growth
CVA (M$)Internal value creation
CFROI (%)Profitability
13.2 14.0 15.2 14.3 14.8
Performance index (1)
External value creation (TSR)
162
104
134
10283
58
5.86.0 6.2 5.9 5.7 5.7
1
2,723
2,257 2,408
1,8471,8171,678
2
Figure 19
Cost of capital
25
Key Ingredients for Success
Most companies still have significant opportuni-ties to improve profitability
In virtually every industry most companies could dra-matically improve both their asset productivity and cashflow margins. This is reflected in the wide spread ofasset productivity and cash flow margins around theaverage in each sector. In the retail sector, for example,average asset productivity is 2.5, but at least one com-pany has shown that it is possible to achieve 10.5, thehighest level recorded in this sector during the period1998–2002 (Fig. 24). Similarly, the average cash flowmargins in the utilities industry over this period was 21%but some firms managed 46% and others as little as 5%(Fig. 25).
Cost of capital
SSKK TTEELLEECCOOMM:: IINNCCRREEAASSEEDD CCVVAA PPRRIIMMAARRIILLYY TTHHRROOUUGGHH HHIIGGHHEERR CCAASSHH FFLLOOWW MMAARRGGIINN
(1) Performance including share price and dividends, end of 1997 = 100Source: Thomson Financial Worldscope; annual reports; BCG analysis
SINCE ASSET PRODUCTIVITY REMAINED CONSTANT, GROWTH COULD BE TRANSLATED INTO PROFITS
10,08210,4708,534
5,6484,147
Cash flow/sales (%)Cash flow margin
15.812.4
21.2
27.0 27.6
Sales/gross investmentAsset productivity
0.7 0.7 0.7 0.70.8
Gross investment (M$)Investment growth
CVA (M$)Internal value creation
CFROI (%)Profitability
11.48.2
15.518.2
21.6
Performance index (1)
External value creation (TSR)
1,017
539287
-510
-1
Figure 20
26
Key Ingredients for Success
Cost of capital
FFOORREESSTT LLAABBSS:: IINNCCRREEAASSEEDD CCVVAA PPRRIIMMAARRIILLYY TTHHRROOUUGGHH HHIIGGHHEERR CCAASSHH FFLLOOWW MMAARRGGIINN
(1) Performance including share price and dividends, end of 1997 = 100Source: Thomson Financial Worldscope; annual reports; BCG analysis
HIGHER MARGIN ADDITIONALLY LEVERAGED BY INCREASED ASSET PRODUCTIVITY
Cash flow/sales (%)Cash flow margin
7.3
13.9
18.221.1
24.7
Sales/gross investmentAsset productivity
1.1
1.6 1.5
2.0
2.5
Gross investment (M$)Investment growth
CVA (M$)Internal value creation
CFROI (%)Profitability
8.1
22.028.0
42.1
61.5
Performance index (1)
External value creation (TSR)
462
255
13968
-8
884785762
557490
Figure 21
Top decile (3)
Bottom decile (3)
PPRROOFFIITTAABBIILLIITTYY AANNDD GGRROOWWTTHH OOFF TTHHEE WWOORRLLDD''SS TTOOPP PPEERRFFOORRMMEERR
WORLDAverage CFROI (%)(1)
(1) Average CFROI 1998–2002(2) CAGR of gross investment 1998–2002(3) Selected according to TSR performance p.a. 1998–2002Note: 207 firms without financial services companies ranked by 5-year TSR, minimum market value 2002: $10BSource: BCG analysis
0
10
20
30
40
50
60
70
-10 -20 5 30 55 80
GI growth (%)(2)
Figure 22
27
AverageCFROI(1)
AverageCFROI(1)
AverageCFROI(1)
AverageCFROI(1)
Top decile (3) Bottom decile (3) Median WACC
GI growth (%)(2)
50 50
50 50
40 40
40 40
30 30
30 30
20 20
20 20
10 10
10 10
0 0
0 0
-10 -10
-10 -10
-20 -20
-20 -20
-10 0 10 20 30 40 50
-20 -10 0 10 20 30 40 50
-20 -10 0 10 20 30 40 50
-10 0 10 20 30 40 50
(%)
(%)
(%)
(%)
GI growth (%)(2)
GI growth (%)(2)
GI growth (%)(2)
Figure 23
(1) Average CFROI 1998–2002(2) CAGR of gross investment 1998–2002(3) Selected according to TSR performance p.a. 1998–2002Source: BCG analysis
LLOOWW--PPEERRFFOORRMMIINNGG IINNDDUUSSTTRRIIEESS WWIITTHH SSIIGGNNIIFFIICCAANNTT LLOOWWEERR AAVVEERRAAGGEE CCFFRROOII TTHHAANN HHIIGGHH--PPEERRFFOORRMMIINNGG IINNDDUUSSTTRRIIEESS
Utilities
Pulp & paper
Low performing industriesConsumer goods
Pharma & biotech
High performing industries
Key Ingredients for Success
HHIIGGHH,, LLOOWW AANNDD MMEEDDIIAANN AASSSSEETT TTUURRNN PPEERR IINNDDUUSSTTRRYY
Source: BCG analysis
0.2
0.7
0.40.7
0.3
0.6
0.1
0.5
0.20.4
Asset turn 1998–2002
10.5
4.7
5.9
2.9
7.4
5.1 5.0
2.9
4.0
1.2
5.6
2.2
0.80.4 0.6 0.5
0.2 0.2 0.3
2.5
1.2 1.2 1.0 1.0 1.00.7
Figure 24
28
Key Ingredients for Success
Investment growth is easily the most significant driver ofshareholder returns, accounting for 71% of TSR, asFigure 30 shows. The top players pull this lever partic-ularly forcefully.
Superior investment growth is one of the keyfeatures of top value creators
A total of 80% of the top-decile value creators grewtheir investment base profitably by more than 10% dur-ing 1998–2002, compared to 21% of firms in the totalsample. In fact superior investment growth was thebiggest differentiator between the top players and thetotal sample (Fig. 18). This can be achieved in allindustries, as Figure 26 demonstrates. In the travel and
tourism industry, for example, which had the lowest TSRand fundamental growth during the period1998–2002, some firms achieved 73% annual invest-ment growth, over six times higher than the world aver-age (12% annually).
However, as discussed earlier, firms should only growonce profitability is above the cost of capital. Failure toadhere to this principle will destroy value, as oneJapanese company recently discovered. During theperiod 1998–2002, the firm steadily increased itsinvestment base by approximately 13% a year whileprofitability was below the cost of capital (Fig. 27). Thisnot only destroyed intrinsic value (measured by nega-
HHIIGGHH,, LLOOWW AANNDD MMEEDDIIAANN CCAASSHHFFLLOOWW MMAARRGGIINN PPEERR IINNDDUUSSTTRRYY
Source: BCG analysis
Cashflow margin 1998–2002 (%)
46
3134 33
35
43
37
26
17
30
21
12
5
11
3
-10
3 35
13 3 2
-4
2117 16 14
12 11 11 10 10 97 6
Figure 25
GROWTH MAKES THE BIGGEST CONTRIBUTION TO TSR
29
Key Ingredients for Success
HHIIGGHH,, LLOOWW AANNDD MMEEDDIIAANN GGRROOSSSS IINNVVEESSTTMMEENNTT GGRROOWWTTHH PPEERR IINNDDUUSSTTRRYY
(1) CAGR of gross investment 1998–2002Source: BCG analysis
GI growth 1998–2002 (%)
5549
67
4640 40
58
81
49
35
73
33
-3
-18
0
-11
-3
-15
0-4 -4
-8 -11 -11
1612 12 12 11 10 10 9 8 7 7 4
80
60
40
20
0
-20
-40
Figure 26
Cost of capital
JJAAPPAANNEESSEE CCOOMMPPAANNYY:: CCFFRROOII BBEELLOOWW CCOOSSTT OOFF CCAAPPIITTAALL,, BBUUTT SSIIGGNNIIFFIICCAANNTT GGRROOWWTTHH OOFF GGRROOSSSS IINNVVEESSTTMMEENNTT
(1) Performance including share price and dividends, end of 1997 = 100(2) Indexed CVA, 1998 = -100Source: Thomson Financial Worldscope; annual reports; BCG analysis
Cash flow/sales (%)Cash flow margin
8.4 8.47.4
5.9 5.4
Sales/gross investmentAsset productivity
0.80.9
0.6
0.9 0.9
Investment growthIndexed CVA(2)
Internal value creation
CFROI (%)Profitability
6.8 7.3
4.35.1 4.7
Performance index (1)
External value creation (TSR)
-294-252
-278
-91-100
162155138
+13% p.a.
90100
Gross investment index (1998 = 100)
Figure 27
30
Key Ingredients for Success
tive CVA), but also led to a total shareholder return of-4.5% a year on average.
Two companies epitomize the value of superior, prof-itable investment growth, Bed Bath & Beyond and HeroHonda:
● Bed Bath & Beyond exploits investmentgrowth to become world's top value cre-ator: High profitability above the cost of capitalgave U.S. household merchandise retailer BedBath & Beyond the fuel to grow its investmentbase by nearly 30% a year during 1998–2002,pushing its annual TSR nearly four times higherthan the World Retail Index. (Fig. 28) Although itsprofitability, which was underpinned by bothhealthy asset productivity and cash flow margins,remained fairly constant over this period, it was
able to use its cash flow "war chest" to fund rollingout an increasing number of new large-formatshops each year.
This was complemented by acquisitions ofHarmon Stores and The Christmas Shop, takingBed Bath into health and beauty and the gift mar-ket respectively. Giving store managers the flexi-bility to manage their inventory, floor layout, andother elements also ensured outlets were able torespond to local market conditions.
The net effect of all these initiatives was an annu-al 36% rise in the company's fundamental valueon average, leading to an annual average TSR of29% over this period. By 2002, Bed Bath &Beyond was the world's most successful value cre-ator.
BBEEDD BBAATTHH && BBEEYYOONNDD:: SSTTEEAADDYY IINNCCRREEAASSEE OOFF CCVVAA TTHHRROOUUGGHH PPRROOFFIITTAABBLLEE GGRROOWWTTHH
CASH FLOW MARGIN AND ASSET PRODUCTIVITY CONSTANT AT HIGH LEVEL
(1) Performance including share price and dividends, end of 1997 = 100Source: Thomson Financial Worldscope; annual reports; BCG analysis
Cash flow/sales (%)Cash flow margin
27.8
Sales/gross investmentAsset productivity
3.5 3.43.1
3.53.3
Gross investment (M$)Investment growth
CVA (M$)Internal value creation
CFROI (%)Profitability
28.1 27.1 25.528.1
Performance index (1)
External value creation (TSR)
1,040234
762
120
876162
54794 39673
9.08.0 7.9 8.1 8.4
+27% p.a.
Figure 28
Cost of capital
31
Key Ingredients for Success
● Hero Honda pulls out all the stops: In 1997investors had high hopes for Hero Honda, a jointventure manufacturer of motorcycles and bicyclesin India, owned by Honda Motors and the MunjalGroup. At the time, expectation premiumsaccounted for 81% of the company's marketvalue. To satisfy these, the company, whose prof-itability was already above the cost of capital,pulled all three fundamental levers of value cre-ation over the next five years: cash flow margins,asset productivity, and investment growth.
To lift profitability higher, Hero Honda increasedcash flow margins from 5.2% to 8.8% throughcost reductions and technological and logisticalsynergies with Honda India, as well as by focusingon medium- to high-margin segments. It alsoboosted asset productivity from 3.6 to 10(Fig. 29). Furthermore, it invested in new produc-
tion capacity in its bid to capture 50% of India's"two-wheeler" market, underpinned by the Munjalbrothers' vision of establishing long-lasting rela-tionships with all key stakeholders, includingemployees, dealers, and vendors.
Together these developments produced 27% TSRa year during 1998–2002, three times higherthan the automotive industry's average. Over thisperiod, the company's intrinsic value grew by 56%annually, halving its expectation premium to 39%.
HHEERROO HHOONNDDAA:: SSTTEEAADDYY IINNCCRREEAASSEE OOFF AASSSSEETT PPRROODDUUCCTTIIVVIITTYY AANNDD CCAASSHH FFLLOOWW MMAARRGGIINN RREESSUULLTTSS IINN SSUUPPEERRIIOORR VVAALLUUEE CCRREEAATTIIOONN
PROFITABILITY VERY HIGH RELATIVE TO AUTOMOTIVE INDUSTRY
(1) Performance including share price and dividends, end of 1997 = 100Source: Thomson Financial Worldscope; annual reports; BCG analysis
Cash flow/sales (%)Cash flow margin
88.1
Sales/gross investmentAsset productivity
3.6 4.05.0
10.0
6.9
Gross investment (M$)Investment growth
CVA (M$)Internal value creation
CFROI (%)Profitability
18.723.6
32.442.1
Performance index (1)
External value creation (TSR)
10677
132
25
136
41
116
11
89
5
8.8
5.25.9
6.5 6.1
Figure 29
Cost of capital
32
Key Ingredients for Success
CONTRIBUTION TO TSRTOP QUARTILE COMPANIES—10 YEAR AVERAGES
(1) Resulting from decreasing interest rate level and lower market risk premiumNote: Top quartile TSR selected from S&P 1500 companies; 10-year averages 1984 – 2002Source: Compustat, BCG Value Science Center
TTSSRR FFOORR TTOOPP QQUUAARRTTIILLEE CCOOMMPPAANNIIEESS PPRRIIMMAARRIILLYY DDRRIIVVEENN BBYY GGRROOWWTTHH
Revenue growth
18.8%
Margin improvement
Growth in multiple(1)
Asset prod.improvement
Dividend yield TSR
3.5%
4.5% -1.2% 0.7% 26.3%
Figure 30
71% of TSR
33
Key Ingredients for Success
Although expectation premiums for the market as awhole tend towards zero in the long run, there arealways premiums in the short to medium term (Fig. 1,page 9). More significantly, the scale of these premiumsdiffers between companies as Figure 31, which showsthe premiums for the top 10 retail firms in 2002, illus-trates. These relative differences in premiums can cre-ate problems as well as opportunities.
Relatively high premiums, for example, enable firms toacquire companies, as AOL did when it used its papersurplus to "merge" with Time Warner. At the other endof the scale, relatively low premiums not only leavecompanies vulnerable to takeovers but also limit theirability to raise additional investment capital. These dif-ferences in premiums need to be regularly monitoredand addressed. In this section we explain how.
What determines relative premiums?
In most cases the differences in firms' expectation pre-miums are due to time lags in investors acquiring thenecessary information needed to value the companiescorrectly. However BCG has identified a number of fac-tors that enable firms to sustain superior premiums.These include:
● Transparency: We found that firms that disclosethe most information tend to enjoy a 20% premi-um.
● Intellectual property rights: Patents and otherintellectual property rights, including brands, pro-tect profitability and growth from competitivepressures. This is why industries like pharmaceuti-cals tend to have one of the highest premiums.
THE IMPORTANCE OF RELATIVE EXPECTATION PREMIUMS
Best Buy Amazon Bed Bath & Beyond
CDW Kohls Lowe's WalMart Woolworths Williams Sonoma
Autozone
Fundamental value
Source: BCG analysis
TTSSRR CCHHAAMMPPIIOONNSS RREETTAAIILL IINNDDUUSSTTRRYY:: BBRREEAAKKDDOOWWNN OOFF CCOOMMPPAANNYY VVAALLUUEE IINN 22000022
17%
Expectation premium
Fundamental value and expectation premium
83%
Company value
78%
22%
-2%
102%
57%
43%
38%
62%
61%
39%
66%
34%
48%
52%
35%
65%
53%
47%
Figure 31
34
Key Ingredients for Success
● Strong corporate reputations: On average,firms with the best reputations experience arounda 25% premium. This is partly due to their abilityto attract high-quality staff and management. Astrong reputation also reduces investor risk.
● Well-structured governance: The nature andownership of stocks can affect a company's pre-miums. For example, investors tend to avoid mul-tiple stock issues that do not entitle them to votingrights, suppressing the stock's price and conse-quently its premium. Removing these obstacles isone way forward. Increasing the liquidity of thestock, for example through stock splits, can alsohelp: on average the most liquid stocks have a10% premium over less liquid stocks.
● Powerful fundamentals: As Figures 2–5 at thebeginning of this report show, companies with thehighest TSR not only make the biggest fundamen-tal improvements, they are also rewarded withmuch higher premiums than average performers.Between 1999 and 2002, for example, NorthAmerica's top 10 TSR companies increased their
intrinsic value by 18% a year, earning them a 48%expectation premium in 2002. The average NorthAmerican firm, however, only grew its fundamen-tals by 8%, leading to a 32% premium by 2002—one-third lower than the top players.
Strategic implications of relative expectationpremiums
Figure 32, which plots expectation premiums againstfundamental value, highlights the strategic implicationsof relative premiums:
● Quadrant 1, the underperformer: The com-pany's premium is below average but justifiably sodue to its comparatively poor fundamental per-formance. Unless investors can be convinced thebusiness can be turned around—lifting its premi-um to at least the average—its situation is likely todeteriorate further, especially as undervaluedcompanies find it difficult to raise investment cap-ital.
VVAALLUUEE OOPPTTIIOONN PPOORRTTFFOOLLIIOO
Fundamental performance (TBR)
Expectation premium
COMPANIES EXPECTATION PREMIUMS RELATIVE TO COMPETITION
Low performance, punished by investors
II III
I IV
Industry average
Industry average
"Hidden Champion"
"Under-performer"
"Consolidator""Optimist"
Focus on fundamental valuesConvince investors of turnaround potential
High market value without corresponding fundamental growth
Focus on fundamentals
High fundamental performance rewarded by investors
Use the premium strategically
Good fundamental values but investors do not trust them
Remove valuereducing factors (transparency, credibility, share structure, ...)
Figure 32
35
Key Ingredients for Success
● Quadrant 2, the optimist: The company's fun-damental performance does not warrant its highpremium. As we discussed in last year's report,unreasonably high premiums tend to be punishedwith disproportionately sharp drops in TSR, leav-ing firms potentially vulnerable to takeovers andother problems. To avoid this fate, firms mustimprove their fundamentals, possibly by usingtheir "paper surplus" to acquire a company withstrong fundamentals but a relatively low expecta-tion premium—notably a "hidden champion" inquadrant 4 (see below).
● Quadrant 3, the consolidator: The ideal posi-tion to be in. The company's strong fundamentalsand premium enable it to acquire a hidden cham-pion.
● Quadrant 4, the hidden champion: Therobust fundamentals of the firm have not beenrewarded by investors, making the company apotential takeover target. The factors suppressingits premium need to be addressed (see below).
Figure 33 shows how this relative premium matrix canbe applied to the retail sector.
Ensuring market and fundamental values arealigned
BCG research, jointly conducted with ThomsonFinancial, has found that companies that harmonizetheir strategies with their dominant investors' require-ments, based on a BCG investor alignment index3, areless likely to experience unjustified expectation premi-ums (Fig. 34). To achieve this yourself, you need to:
● Identify your dominant investor segment'sstyle: Most companies have a variety of investorsegments—institutional and private—with varyingaspirations such as yield, value, and "growth at areasonable price" (GARP). To establish your coreinvestors' aspirations, a detailed analysis of yourinvestor base is required. BCG has developedtools to facilitate this process.
-10 0 10 5020 30
80
20
10
0
-10
Average
34.7%(3)
Average 16.1% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
50
40
Value option portfolio
30
70
60
40
AmazonWoolworths
Wal MartKohls
Bed Bath & BeyondLowe's
Autozone
Williams Sonoma
Best Buy
CDW Computer
RREETTAAIILL IINNDDUUSSTTRRYY:: FFUUNNDDAAMMEENNTTAALL PPEERRFFOORRMMAANNCCEE VVEERRSSUUSS EEXXPPEECCTTAATTIIOONN PPRREEMMIIUUMM
(1) Weighted average of total sampleSource: BCG analysis
Figure 33
3 The index measures the consistency of the fundamental data relative to the investor base. A score of 1 indicates that fundamentals are aligned with investors' criteria.
36
Key Ingredients for Success
● Link your strategy and internal processeswith their expectations: This should includealigning TSR goals, internal plans, and even staffincentives. Some firms even rotate line managersthrough the investor relations (IR) function to helpthem think about how to run their units in a moreinvestor-focused manner.
● Establish a close dialogue with your coreinvestor segment: Regular, non-defensive,face-to-face contact with core investors is critical,as our research into the importance of trans-parency (see above) underlines.
0.5
-0.1
-0.2
Investor alignment index
Valuation gap
0.2
0.1
IInndduussttrriiaall
0
0.4
0.3
IINNVVEESSTTOORR AALLIIGGNNMMEENNTT HHAASS MMAATTEERRIIAALL IIMMPPAACCTT OONN VVAALLUUAATTIIOONN GGAAPP
Source: BCG Value Science Center
NNoottee::
iinnvveessttoorr aalliiggnnmmeenntt iinnddeexx
Investors classified into different styles: (AGM = aggressive growth and momentum; GARP = growth at reasonable price)The measures the consistency of the fundamental data in relation to the investor base. A score of 1 indicates that the fundamentals are aligned with the criteria of the investors.Valuation gap defined as (MV - FV)/FV; MV = market value (as of 03/28/02), FV = fundamental value, calculated by proprietary BCG VS methodology
0 20 40 60 80 100
0.4
-0.8
Investor alignment index
Valuation gap
-0.2
-0.4
PPhhaarrmmaa
-0.6
0.2
0
0 20 40 60 80 100
0.2
-0.3
-0.4
Investor alignment index
Valuation gap
0
-0.1
RReettaaiill
-0.2
0.1
0 20 40 60 80 100
AGM Growth GARP Value Yield
y = 0.0026x + 0.06R = 0.222
y = 0.005x - 0.06R = 0.532
y = 0.0027x - 0.26R = 0.602
Deere & Co.Honeywell Int. Inc.
Ingersoll-Rand Co. Ltd.
Goodrich Corp.
Textron Inc.
UTXBoeing Co.
Fortune Brands Inc.
American Standard
Stanley Works
Danaher Corp.
Illinois Tool- worksDover Corp.
Snap-On Inc.
ITT Industries Inc.
Caterpillar Inc.
CVS Corp.
Target Corp.Costco Wholesale
Corp. Gap Inc.Best Buy Co. Inc.
Staples Inc.
Lowe's COS
WalMart Stores
TJX Companies Inc.
Walgreen CO
MAY Dep. Stores Co.Limited Brands
Merck & Co.
Baxter Int. Inc.
Abbott Laboratories
Johnson &
Biogen Inc.
Amgen Inc.Schering-Plough
Bristol Myers Squibb Lilly (Eli) & Co.
Kohls Corp.
Figure 34
During the bull market of the 1980s and 1990s divi-dends fell out of fashion. This was largely due to thefact that average TSR was in the high teens, makinggrowth a much more attractive proposition for investorsthan a 3–4% dividend yield. Moreover, paying divi-dends during this period, rather than reinvesting thesurplus, was often seen as an admission that manage-ment had run out of ideas for generating growth.
This preference for growth over yield, however, wasunusual. Historically, dividends have accounted fornearly half of shareholder value. Over the last 70years, for example, the average annual TSR of U.S.equities has been close to 10% and dividend yieldsaround 4%. If TSR continues to decline towards its long-term average of 10%, we can expect a similar balancein the future.
Historical precedents aside, though, there are severalreasons why firms should now consider dividends intheir shareholder value mix:
● Dividends reassure investors that a firm is makinggenuine progress—they are paid in cash and can-not be manipulated, unlike accounting-basedmeasures of success such as earnings per share(EPS). This reassurance is particularly important inthe wake of recent accounting and governancescandals.
● Research has shown that companies that raisetheir dividends significantly tend to enjoy higherstock values. Since 2001 for instance a dozenS&P 500 companies have increased their divi-dends by 20% or more, leading to an average2.7% lift in their stock values within ten days ofannouncing the increase. The restaurant chainLone Star Steakhouse & Saloon is a case in point.When it started paying dividends, its TSR rose by23% and its P/E ratio by 18%.
● A study in the Financial Analysts Journal4 foundthat companies with higher payout ratios havesubstantially higher long-term earnings growththan those with lower payout ratios.
Whether dividends are an appropriate element of acompany's shareholder value mix will depend on theindividual firm. A BCG Perspective, Thinking Differentlyabout Dividends, outlines the key issues firms need toconsider.
37
A NOTE ON DIVIDENDS
4 See Robert D. Arnott & Clifford S. Asness: "Surprise! Higher Dividends = Higher Earnings Growth" in Financial Analysts Journal Jan./Feb. 2003, Vol. 59, No. 1
38
Measure corporate success by TSR—the"gold standard" of value creation. SuperiorTSR not only makes it easier to raise additionalinvestment capital but also to retain and attracthigh quality staff. It also lowers the risks of atakeover.
Strive for high TSR irrespective of yourindustry. As we have shown, firms in all indus-tries are able to generate substantial TSR, oftensignificantly above both the global average andthe averages of other industries.
Set a realistic TSR target, stretched over,say, three years. Overly ambitious goals arelikely to lead to unsustainably high expectationpremiums, which will ultimately be punished witha disproportionate drop in TSR.
Never lose sight of the fact that fundamen-tals drive shareholder returns in the longrun. Don't rely on expectation premiums to fuelTSR; in the long run expectation premiums declineto zero. Strong fundamentals are the only way toproduce superior, sustainable shareholderreturns. Convert your external TSR goal into aninternal fundamental equivalent.
Measure fundamental value creation withappropriate tools. Total Business Returns (TBR)and Cash Value Added (CVA) are the most suit-able tools in BCG's view. These not only have astrong relationship with TSR, they also don't sufferfrom the accounting distortions and other pitfallsassociated with the more commonly used meas-ure EBITDA. Moreover they can be disaggregated
into a "value-driver tree" of practical targets andcontrol metrics for each business unit.
Control fundamental value with TBR's andCVA's two key components—CFROI andgross investment. To improve profitability, focuson both asset productivity and cash flow margins.Asset productivity initiatives should include regularreviews of working capital as well as efforts toreduce fixed, unproductive assets. To lift cash flowmargins, search for opportunities to introduce"value-added" price increases, for examplethrough more sophisticated customer segmenta-tion and innovation; cost reductions have finitelimits. Only grow your investment base once prof-itability is above the cost of capital. Benchmark allfundamental goals against your peers.
Align incentives with your fundamentalvalue-creation targets. This should be done atboth a business-unit and corporate level, ensuringall areas of the business are working towards thesame fundamental (and TSR) goal.
Manage your business units as a portfolioof value creators and destroyers. "Decon-struct" your portfolio to identify units with compet-itive strengths in markets with growth potential, aswell as those with little value-creation future. Aimfor profitable growth with the value creators andshed or milk the value destroyers and laggards.Regularly review your portfolio to ensure it is instep with competitive developments.
Harmonize your strategy with your domi-nant investors' expectations. Assess your core
CEO Checklist
CEO CHECKLIST
39
investors' expectations. Either reconfigure yourstrategy to meet to their demands or (a harder,longer task) reconfigure your investor base toalign it with your strategy. Consider your dividendstrategy.
Monitor and manage your relative expecta-tion premiums. Although fundamentals drivelong-term TSR, there will nearly always be expec-tation premiums in the short to medium term. Therelative size and direction of your premium
(whether it's positive or negative) will createopportunities and threats that need to beaddressed. Also, seek ways to generate sustain-able expectation premiums, for example throughgreater transparency. Ultimately, though, successis a question of superior fundamentals.
CEO Checklist
6
41
REGIONAL AND INDUSTRY RANKINGS
42
Avg. CFROI12.3%(4)
Best Buy
0 5 10 15 20 3025
Amgen Best Buy
Bed Bath & Beyond
SK TelecomStryker
Samsung ElectronicsHarley-Davidson
Forest Labs.QualcommNokia
84%16%
100
76%
24%
690
73%
27%
439
67%
33%
477
+41%+25%
-39%
+480%
Company value index (1)
Harley-Davidson
-20 0 20 6040
60
30
-30
Average
23.0%(3)
Average 10.2% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
25%5%
-20%15%97%
-11%12%11%34%
5%
39%25%
0%51%26%
-18%47%48%62%46%
2,831470
1,018491296
2,012331162
-841243
Samsung ElectronicsForest Labs.SK TelecomQualcommBest BuyNokiaStrykerBed Bath & BeyondAmgenHarley-Davidson
123456789
10
KRUSKRUSUSFIUSUSUSUS
58%51%45%43%31%31%30%29%29%28%
10%11%11%
5%13%25%13%41%11%36%
50,85518,77812,93833,61315,37966,36914,95111,31482,70914,588
++++
+++++
+++++
++++++
+++
++++++++++
+–++–+
+++++
+––
++++++
––
++
+++++++++++
–++++++
+–
++
1997 1999 2002 2003(2)
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TSR RANKING
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
Cash flow margin asset productivity 2002versus
Asset turn 2002
Cash flow margin 2002 (%)
8
5
4
3
2
1
0
Average1.2%(4)
Average 14% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
++
+
–
++++++–
5%
WORLDTTSSRR RRAANNKKIINNGG
0
Amgen
Stryker
Forest Labs.SK Telecom
Best Buy
Nokia
Samsung Electronics
QualcommBed Bath & Beyond
20%
7
6Nokia
Bed Bath & Beyond
Forest Labs.
StrykerQualcomm
Harley-Davidson
Samsung Electronics
Amgen
SK Tele-com
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 274 companies; minimum market value 2002: $10B(4) Simple average of total industry sample Source: BCG analysis
Note: MV:EP:CFM:AP:
Market value of equityExpectation premiumCash flow marginAsset productivity
43
Bed Bath & Beyond
Harley-Davidson
Avg. CFROI12.3%(4)
Harley-DavidsonBed Bath & Beyond
-20 0 20 6040
60
30
-30
Average
23.0%(3)
Average 10.2% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
0
Sysco
WORLD TTBBRR RRAANNKKIINNGG
1997
47%
33%
100
1999
79%
21%
315
2002
48%
52%
196
2003(2)
45%
55%
213
+42%+15%
-28%
+93%
1997 1999 2002 2003(2)
14%11%
8%5%
11%-4%-4%52%26%25%
36%48%48%46%62%42%51%
6%42%
2%
226162
-343243262816294229189540
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TBR RANKING
SLMBed Bath & BeyondMicrosoftHarley-DavidsonSyscoFifth Third BancorpKohlsGuidantUnited TechnologiesGolden West Financial
123456789
10
USUSUSUSUSUSUSUSUSUS
23%29%10%28%23%12%27%
0%13%18%
52%41%37%36%31%31%30%30%29%29%
17,72411,314
300,62914,58821,21331,64518,16214,57636,23013,635
NA+++
+++++
++++++
++
NA
NA
NA
NA
NA
+–++
+++
NA
NA
NA
––
+++
–––
NA
NA
NA
+–
+++
+––
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Cash flow margin asset productivity 2002versus
Company value index (1)
Kohls
Fifth Third Bancorp Microsoft
SLM
Guidant
United Technologies
Golden West Financials
0 5 10 15 20 3025
Microsoft Guidant
Bed Bath & BeyondKohls
Harley-Davidson
Sysco
Asset turn 2002
Cash flow margin 2002 (%)
8
5
4
3
2
1
0
Average1.2%(4)
Average 14%(4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
++
+
–
++++++–
5%20%
7
6Sysco
Kohls Guidant Microsoft
United Technologies
United Technologies
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 274 companies; minimum market value 2002: $10B(4) Simple average of total industry sample Source: BCG analysis
44
5%
20%
-10 0 10 4020 30
76%
24%
100
65%
35%
337
71%
29%
277
73%
27%
265
+25%+19%
-29%
+199%
Company value index (1)
90
-30
Average
11.9%(3)
Average 8.0% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
-11%-13%
4%7%
-1%9%
-18%-1%9%7%
-18%5%
55%49%15%48%74%
-19%5%
28%
2,012-391
8747
-445759
-1725
40410
NokiaBouyguesBeiersdorfRoyal Bank of ScotlandPeugeot SASociete GeneraleL'OréalSvenska CellulosaCentricaRio Tinto
123456789
10
FIFRDEUKFRFRFRSEUKUK
31%23%23%18%17%16%16%16%15%15%
25%4%
21%0%
12%14%
6%17%24%12%
66,3697,9339,609
72,4379,922
26,27241,611
7,47612,84722,012
++++NA+
+++++++
NA
–++
+
+++
++
NA
NA
+++–+
++
––––
NA
NA
+++++
+
+++–
NA
NA
1997 1999 2002 2003(2)
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TSR RANKING
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
0 5 10 15 20 25
Average
1.2%(4)
Average 13.0% (4)
Nokia
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++ Nokia
SCACentrica
BouyguesPeugeotL'OréalBeiersdorf
++
+
–
++++++–
AverageCFROI12.1%(4)
EUROPETTSSRR RRAANNKKIINNGG
70
50
30
10
-10
Beiersdorf
Centrica
Société Generale
Rio Tinto
Peugeot
Nokia
Svenska Cellulosa
L'Oréal
Royal Bank of Scotland
Bouygues
6
5
4
3
2
1
0
Centrica
Bouygues
Peugeot
BeiersdorfL'Oréal
SCA
Rio Tinto
Rio Tinto
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 111 companies; minimum market value 2002: $7.5B(4) Simple average of total industry sample Source: BCG analysis
45
Reckitt Benckiser
Bank of Ireland
Unicredito Italiano
Banco Popular Espanol
Novo Nordisk
5%
20%
Nokia
Centrica Reckitt Benckiser
Heineken
Novo Nordisk
-10 0 10 4020 30
90
-30
Average
11.9%(3)
Average 8.0% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
70
50
30
10
-10
EUROPE TTBBRR RRAANNKKIINNGG
1997
65%
15%
100
1999
68%
32%
453
2002
26%
74%
293
2003(2)
23%
77%
284
+50%+14%
-37%
+195%
1997 1999 2002 2003(2)
12%12%11%
9%-11%14%
9%15%
3%-15%
24%8%
30%24%
-18%65%
5%-25%54%40%
347-212
1,236246
2,012-1,400
404218139174
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TBR RANKING
Banco Popular EspanolKBCUnicredito ItalianoBank of IrelandNokiaUBSCentricaNovo NordiskReckitt BenckiserHeineken
123456789
10
ESBEITIEFISEUKDKUKNL
7%-3%8%
11%31%
1%15%
4%8%
13%
32%27%27%26%25%25%24%23%23%22%
9,67810,37226,89610,51566,36967,31812,84710,07013,77212,830
NA
++
+++++
NANANA
NA
NANANANA
NA–
++–+
NANANANA
+++NA–+
+++
NANANANA
+++NA++++
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Cash flow margin asset productivity 2002versus
Company value index (1)
UBS
Nokia
Centrica
KBC
Heineken
0
Asset turn 2002
Cash flow margin 2002 (%)
0 5 10 15 20 25
Average
1.2%(4)
Average 13.0% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++ Nokia
Novo NordiskReckitt BenckiserHeineken
++
+
–
++++++–
AverageCFROI12.1%(4)
6
5
4
3
2
1
0
Centrica
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 111 companies; minimum market value 2002: $7.5B(4) Simple average of total industry sample Source: BCG analysis
46
WoolworthS
Average0.9%(4)
0
6
5
4
3
2
1
0
-10 0 10 3020
82%
18%
100
44%
56%
217
90%
10%
261
77%
23%
268
+22%
+25%
+129%
Company value index (1)
100
-60
Average
1.5%(3)
Average 7.7% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
-24%25%
-20%13%
6%16%
5%19%-6%7%
80%39%
0%-16%41%43%38%
-26%41%26%
392,8311,018
-8954
15249
1,45487
550
WiproSamsung ElectronicsSK TelecomPoscoWoolworthsSaint George BankWesfarmersHyundai MotorFujisawa PharmaANZ Banking Group
123456789
10
INKRKRKRAUAUAUKRJPAU
78%58%45%24%21%21%21%20%20%16%
25%10%11%11%20%16%14%26%14%22%
6,07750,85512,93810,103
6,7435,8175,7346,1147,067
15,336
+++++
++++
++NA
++++++
+NA
+++
+++++NA++
++NA
–++
+––
NA+
+++–
NA
++++
+++–+NA+
++++NA
1997 1999 2002 2003(2)
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TSR RANKING
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
5 10 15 20 75
Average 14.7% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++Hyundai MotorSK Telecom
Samsung Electronics
Fujisawa
Posco
++
+
–
++++++–
Av. CFROI8.7%(4)3%
ASIA-PACIFICTTSSRR RRAANNKKIINNGG
80
60
0
-20
-40
40
20ANZ Banking
WoolworthsSaint George Bank
Fujisawa Pharm.
SK Telecom
Samsung Electronics
Posco
Hyundai Motor
Wesfarmers
Wipro
-35%
25 30
15%
Woolworths Wesfarmers
Wipro
Hyundai Motor
WiproSK Telecom
PoscoFujisawa
Wesfarmers
Samsung Electronics
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 94 companies; minimum market value 2002: $5B(4) Simple average of total industry sample Source: BCG analysis
47
ASIA-PACIFIC TTBBRR RRAANNKKIINNGG
1997
56%
43%
100
1999
57%
43%
163
2002
26%
74%
153
2003(2)
29%
71%
166
+12%+18%
-23%
+44%
1997 1999 2002 2003(2)
19%9%
-24%22%14%
7%22%
6%7%
-8%
-26%29%80%35%25%26%62%41%14%51%
1,454356
39578320550703
54-399
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TBR RANKING
Hyundai MotorCommonwealth Bk.of Aus.WiproWestpac BankingTelstraANZ Banking GroupHang Seng BankWoolworthsHong Kong ElectricKao
123456789
10
KRAUINAUAUAUHKAUHKJP
20%14%78%12%
9%16%
8%21%
5%8%
26%25%25%22%22%22%20%20%19%18%
6,11419,504
6,07716,25634,39215,33623,290
6,7438,169
11,921
+++NA
+++
+
++++
NA
NANA
+NA
++
++
++++
++
NA
NANA
+++NA–
NA–
–––
NANA
+++NA
++NA–
+–+
NANA
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Cash flow margin asset productivity 2002versus
Company value index (1)
-10 0 10 3020
100
-60
Average
1.5%(3)
Average 7.7%(3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
80
60
0
-20
-40
40
20
Woolworths
Hyundai Motor
Wipro
Kao Hang Seng Bank
CBAWestpac
ANZ Banking
HK Electric
Telstra
Woolworths
Average0.9%(4)
0
6
5
4
3
2
1
0 0
Asset turn 2002
Cash flow margin 2002 (%)
5 10 15 20 75
Average 14.7% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++ Hyundai Motor
Kao
TelstraHong Kong Electric
++
+
–
++++++–
Av. CFROI8.7%(4)3%
25 30
15%
Woolworths
Wipro
Hyundai Motor
Wipro Hong Kong Electric
TelstraKao
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 94 companies; minimum market value 2002: $5B(4) Simple average of total industry sample Source: BCG analysis
48
1.3%(4)
Average
Avg. CFROI13.4%(4)
8
5
4
3
2
1
0
7
6
0 5 10 15 25 3520 30
-10 0 10 6020
67%33%
100
79%
21%
589
48%
52%
388
53%
47%
459
+37%+18%
+275%
Company value index (1)
80
-40
Average
32.4%(3)
Average 12.6% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
5%15%97%12%11%34%
5%-4%39%
4%
25%51%26%47%48%62%46%51%47%34%
470491296331162
-841243294574818
Forest Labs.QualcommBest BuyStrykerBed Bath & BeyondAmgenHarley-DavidsonKohlsLowe'sOracle
123456789
10
USUSUSUSUSUSUSUSUSUS
51%43%31%30%29%29%28%27%26%24%
11%5%
13%13%41%11%36%30%20%18%
18,77833,61315,37914,95111,31482,70914,58818,16240,78161,099
++++
+++++++++
+++
++++++++
++++++
+++–+++
+++
+++––
+++––
++–––
++++++
–+++
+–
+++++
1997 1999 2002 2003(2)
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TSR RANKING
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
Cash flow margin asset productivity 2002versus
Asset turn 2002
Cash flow margin 2002 (%)
Average 14.0% (4)
Harley-Davidson
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++ Stryker
Harley-Davidson
Oracle
Amgen Best Buy
++
+
–
++++++–
8%
NORTH AMERICATTSSRR RRAANNKKIINNGG
60
0
-20
40
20-26%
30 40 50
Bed Bath & Beyond
Kohls
Stryker
Lowe's
OracleBest Buy
Forest Labs.
QualcommAmgen Harley-
Davidson
18%
Forest Labs.Qualcomm
Bed Bath & BeyondKohlsLowe's
Best Buy
Lowe'sKohls
Bed Bath & Beyond
Stryker
Forest Labs.
OracleQualcommAmgen
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 146 companies; minimum market value 2002: $10B(4) Simple average of total industry sample Source: BCG analysis
49
Harley-DavidsonKohls
Bed Bath & Beyond
Bed Bath & Beyond
Harley- Davidson
-10 0 10 6020
80
-40
Average
32.4%(3)
Average 12.6%(3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
60
0
-20
40
20
30 40 50
NORTH AMERICA TTBBRR RRAANNKKIINNGG
1997
67%
33%
100
1999
79%
21%
315
2002
48%
52%
196
2003(2)
45%
55%
213
+15%
-28%
+93%
1997 1999 2002 2003(2)
14%11%
8%5%
11%-4%-4%52%26%25%
36%48%48%46%62%42%51%
6%42%
2%
226162
-343243262816294229189540
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TBR RANKING
SLMBed Bath & BeyondMicrosoftHarley-DavidsonSyscoFifth Third BancorpKohlsGuidantUnited TechnologiesGolden West Financial
123456789
10
USUSUSUSUSUSUSUSUSUS
23%29%10%28%23%12%27%
0%13%18%
52%41%37%36%31%31%30%30%29%29%
17,72411,314
300,62914,58821,21331,64518,16214,57636,23013,635
NA+++
+++++
++++++
++
NA
NA
NA
NA
NA
+–++
+++
NA
NA
NA
––
+++
–––
NA
NA
NA
+–
+++
+––
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Cash flow margin asset productivity 2002versus
Company value index (1)
SLMMicrosoft
SyscoKohls
Guidant
Fifth Third Bancorp
United Technologies
Golden West Financials
+42%
1.3%(4)
Average
Avg. CFROI13.4%(4)
8
5
4
3
2
1
0
7
6
0 5 10 15 25 3520 30
Asset turn 2002
Cash flow margin 2002 (%)
Average 14.0%(4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
Harley-Davidson
Sysco
Microsoft Guidant
++
+
–
++++++–
8%18%United Technologies
Bed Bath & BeyondKohls
Sysco
United Technologies
Guidant
Microsoft
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 146 companies; minimum market value 2002: $10B(4) Simple average of total industry sample Source: BCG analysis
50
70%8%
52%81%
5%28%52%-5%19%10%
25%33%46%81%46%33%58%
-13%-26%34%
1751995
-24243
7240
2861,454
24
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company
Hyundai MobisToyoda GoseiStanley ElectricDenway MotorsHarley-DavidsonHero Honda MotorsJSRPorscheHyundai MotorGentex
123456789
10
Country
KRJPJPHKUSINJPDEKRUS
Avg. TSR'98–'02
56%38%32%29%28%27%24%21%20%19%
14%11%13%
9%36%25%
7%27%26%26%
2,6472,5043,1722,101
14,5881,2883,8776,6306,1142,661
++++
++++
++++++++
+++
++
+++++++
+–
–
+++++
+++++
+++
–
––
–
++++
++
+++++
+++
+++
–
–
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 56 companies; minimum market value 2002: $3B(4) Simple average of total industry sample
Fundamental performance p.a. (TBR) 1998–2002 (%)1997
74%
26%
100
1999
70%
30%
173
2002
95%
5%
286
2003(2)
85%
15%
315
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+28%+31%
-37%
Value option portfolio
-10
Expectation premium 2002 (%)
80
60
40
20
0
-20
-40
-60
-80 0 10 20 30 40
Average
8.1%(3)
Average 9.2% (3)
DenwayII
I
III
IV
HyundaiMotor
HyundaiMobis
Hero HondaMotors
Porsche
Toyoda Gosei
GentexJSRStanley Electric
Harley-Davidson
5-YEAR TSR RANKING
AUTOMOTIVE INDUSTRY
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
Cash flow margin versus asset productivity 2002
0
Asset turn 2002
Cash flow margin 2002 (%)
10.0
2.5
2.0
1.5
1.0
0.5
0 5 10 15 20 25
Average
1.4%(4)
Average 7.3%(4)
Denway
Hyundai MotorHyundai Mobis
Hero Honda Motors
PorscheToyoda Gosei
Gentex
JSR
Stanley Electric
Harley-Davidson
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++ Hyundai MobisHero Honda Motors
Hyundai Motor
Stanley ElectricHarley-DavidsonPorsche
Toyoda GoseiJSR
Denway Motors Gentex
++
+
–
++++++–
+42%
TTSSRR RRAANNKKIINNGG
5%
15%
Source: BCG analysis
AverageCFROI 9.5%(4)
51
Average 7.3%(4)
AverageCFROI 9.5%(4)
5%
15%
Fundamental performance p.a. (TBR) 1998–2002 (%)1997
70%
30%
100
1999
77%
23%
135
2002
112%
-13%
180
2003(2)
103%
-3%
189
5%-5%19%10%28%28%
0%16%63%19%
46%-13%-26%34%-3%33%
-47%-12%41%
8%
243286
1,45424
12672
-23-1,232
-57-63
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+22%
-22%
Value option portfolio
-10
Expectation premium 2002 (%)
80
60
40
20
0
-20
-40
-60
-80 0 10 20 30 40
Average
8.1%(3)
Average 9.2% (3)
Volkswagen
II
I
III
IV
HyundaiMotor
AisinSeiki
Hero HondaMotors
PorscheScania
GentexPaccar
Harley-Davidson
5-YEAR TBR RANKING
Harley-DavidsonPorscheHyundai MotorGentexMagna Intl.Hero Honda MotorsAisin SeikiVolkswagenPaccarScania
123456789
10
USDEKOUSCAINJPDEUSSE
28%21%20%19%
2%27%
5%-6%10%
2%
36%27%26%26%25%25%21%21%20%20%
14,5886,6306,1142,6616,1651,2883,953
15,7748,6714,441
++++
+++++++++
+++++
+++
+–+
+++
++++
++–
+++–+
+++––––
++++
+++–+
+++++––
AUTOMOTIVE INDUSTRY
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
10.0
2.5
2.0
1,5
1.0
0.5
0 5 10 15 20 25
Average
1.4%(4)
Hyundai Motor
Hero Honda Motors
Porsche
GentexHarley-Davidson
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++ Hero Honda Motors Hyundai Motor
Harley-DavidsonPorsche
Aisin SeikiVolkswagen
PaccarScania
Gentex
++
+
–
++++++–
+2%
TTBBRR RRAANNKKIINNGG
Magna Intl.
Magna Intl.
Scania
Magna Intl
VW
PaccarAisin Seiki
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 56 companies; minimum market value 2002: $3B(4) Simple average of total industry sample Source: BCG analysis
52
14%7%
25%9%7%9%1%
13%23%
3%
36%49%
2%48%26%29%37%24%36%46%
22647
540759550356147
1,816510
-1
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
AVE in M$'98–'02
No. Company
SLMRoyal Bank of ScotlandGolden West FinancialSociét G n raleANZ Banking GroupCommonwealth Bk. of Aus.National Australian BankBNP ParibasBank Of Nova ScotiaAllied Irish Banks
é é é
123456789
10
Country
USUKUSFRAUAUAUFRCAIE
Avg. TSR'98–'02
23%18%18%16%16%14%13%13%12%12%
52%0%
29%14%22%25%12%21%12%14%
17,72472,43713,63526,27215,33619,50426,02239,90320,20911,252
Avg.'98–'02
TBR MV in M$30 Sept. '03
Fundamental performance p.a. (TBR) 1998–2002 (%)1997
62%
38%
100
1999
59%
41%
162
2002
65%
35%
253
2003(2)
63%
37%
268
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+23%+20%
+10%
Value option portfolio
-10
Expectation premium 2002 (%)
60
50
40
30
20
10
0
-10 0 10 20 30 60
Average
40.3%(3)
Average 13.9% (3)
II
I
III
IV
5-YEAR TSR RANKING
BANKS
+33%
TTSSRR RRAANNKKIINNGG
Societé GeneraleAllied Irish Bank SLM
National Australia BankRBS
Bank of Nova Scotia CBA
BNP Paribas
Golden WestFinancial
ANZ Banking Group
40 50
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 51 companies; minimum market value 2002: $10B Source: BCG analysis
53
1997
47%
53%
100
1999
49%
51%
205
2002
40%
60%
252
2003(2)
37%
63%
271
14%-4%25%
0%11%
9%17%
9%11%14%
36%42%
2%14%30%24%36%29%
2%65%
226816540532
1,236246440356326
-1,400
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
AVE in M$'98–'02
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+48%
-1%
Value option portfolio
5-YEAR TBR RANKING
No. Company
SLMFifth Third BancorpGolden West FinancialBB & TUnicredito ItalianoBank of IrelandState StreetCommonwealth Bk.of Aus.National CityUBS
123456789
10
Country
USUSUSUSITIEUSAUUSCH
Avg. TSR'98–'02
23%12%18%
6%8%
11%7%
14%0%1%
52%31%29%28%27%26%26%25%25%25%
17,72431,64513,63519,67926,89610,51514,97919,50418,09360,973
Avg.'98–'02
TBR MV in M$30 Sept. '03
BANKS
+41%
TTBBRR RRAANNKKIINNGG
Fundamental performance p.a. (TBR) 1998–2002 (%)-10
Expectation premium 2002 (%)
60
50
40
30
20
10
0
-10 0 10 20 30 60
Average
40.3%(3)
Average 13.9% (3)
II
I
III
IV
SLM
UBS
CBA
Golden WestFinancial
40 50
+14%
Bank of IrelandUnicredito Italiano
State Street
BB&T
National City
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 51 companies; minimum market value 2002: $10B Source: BCG analysis
Fifth Third Bancorp
54
23%38%-2%52%
9%17%
-12%8%
44%7%
14%-10%-25%34%12%33%11%37%60%40%
-128-18
-233-649
-907
-121-2463
-34
Mitsui ChemicalsDaicel Chem.Inds.DSMReliance Inds.CabotJohnson MattheySumitomo ChemicalShin-Etsu ChemicalNitto DenkoValspar
123456789
10
JPJPNLINUSUKJPJPJPUS
19%17%14%14%12%11%11%10%
9%8%
4%6%8%
13%7%
17%6%
11%7%
26%
4,2891,3994,319
12,9301,7593,2285,678
14,9567,0722,362
+++++
++++++
–+–––+++++
+––
++––––+–
–+–+––+++–
Fundamental performance p.a. (TBR) 1998–2002 (%)1997
86%
14%
100
1999
65%
35%
140
2002
83%
17%
147
2003(2)
75%
25%
164
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+3%+10%
-21%
Value option portfolio
-10
Expectation premium 2002 (%)
60
40
20
0
-20
-40 0 10 30
Average
18.6%(3)
Average 8.4% (3)
Valspar
II
I
III
IV
5-YEAR TSR RANKING
CHEMICALS
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP TSR COMPANIES
Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
3.0
2.5
2.0
1.5
1.0
0.5
0 5 10 15 20
Average0.8%(4)
Average 10.2%(4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
DaicelRelianceSumitomoShin-EtsuNitto Denko
++
+
–
++++++–
AverageCFROI 7.3% (4)
+87%
TTSSRR RRAANNKKIINNGG
5%
10%
20
Johnson MattheyShin-Etsu
Nitto Denko
Reliance
Sumitomo
Cabot
Mitsui
DSM
Daicel
MitsuiDSMCabotValspar
JohnsonMatthey
Johnson Matthey
Nitto DenkoReliance
Shin-Etsu Chemical
Daicel
DSM
MitsuiSumitomo Chemical Cabot
Valspar
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 55 companies; minimum market value 2002: $1B(4) Simple average of total industry sample Source: BCG analysis
55
0
Asset turn 2002
Cash flow margin 2002 (%)
3.0
2.5
2.0
1.5
1.0
0.5
0 5 10 15 20
Average0.8%(4)
Average 10.2%(4)
AverageCFROI 7.3% (4)
5%
10%
1997
63%
37%
100
1999
59%
41%
127
2002
30%
70%
141
2003(2)
34%
66%
154
7%36%17%46%
7%9%
-7%52%13%
4%
40%66%33%39%34%18%33%34%33%18%
-3438
7-578
-4123
2-649
-1,89027
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+9%
-7%
Value option portfolio
5-YEAR TBR RANKING
ValsparMilliporeJohnson MattheyNan Ya PlasticsCarlisle CosLubrizolAkzo NobelReliance Inds.Dow ChemicalsAirgas
123456789
10
USUSUKTWUSUSNLINUSUS
8%4%
11%0%1%0%
-3%14%
1%4%
26%17%17%16%16%13%13%13%13%12%
2,3622,2413,2287,5781,3381,6718,039
12,93029,804
1,306
++
+++++++++
+++
+++
––+––+
–––––++
++–+
–++
–––+++–+
CHEMICALS
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Cash flow margin asset productivity 2002versus
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
++
+
–
++++++–
+18%
TTBBRR RRAANNKKIINNGG
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
+10%
-10
60
40
20
0
-20
-40 0 10 30
Average
18.6%(3)
Average 8.4% (3)
Valspar
II
I
III
IV
20
Johnson Matthey
Millipore
CarlisleDow
Akzo Nobel
Lubrizol
Nan Ya PlasticsReliance
Airgas
RelianceLubrizolAkzo NobelAirgas
Millipore
ValsparNan YaCarlisleDow
JohnsonMatthey
Johnson Matthey
ValsparCarlise
Airgas
Dow Chemical
Akzo NobelMillipore
Reliance
Nan Ya Plastics
Lubrizol
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 55 companies; minimum market value 2002: $1B(4) Simple average of total industry sample Source: BCG analysis
56
11%4%
57%-3%3%
13%3%
14%-18%14%
62%55%60%34%57%16%53%38%74%34%
262872886
325162
76177
-172-181
SyscoBeiersdorfTiffany & Co.Gallaher GroupAnheuser-BuschWeston GeorgeHermès Intl.LoblawL'OréalPernod-Ricard
123456789
10
USDEUSUKUSCAFRCAFRFR
23%23%22%21%19%18%17%16%16%15%
31%21%23%24%16%13%16%16%
6%5%
21,2139,6095,4385,922
40,7938,4465,136
10,50041,611
6,014
+++
++++++
++++
+++++
++
++
++–++
++++
++
++–+––––––
++––++
++++–
Fundamental performance p.a. (TBR) 1998–2002 (%)1997
50%
50%
100
1999
35%
65%
170
2002
41%
59%
210
2003(2)
45%
55%
204
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+8%+13%
+4%
Value option portfolio
-10
Expectation premium 2002 (%)
100
60
40
20
0
-20 0 10 40
Average
39.5%(3)
Average 13.6% (3)
Sysco
II
I
III
IV
5-YEAR TSR RANKING
CONSUMER GOODS
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
5.0
4.0
3.0
2.0
1.0
0 5 10 15 20 25
Average1.4%(4)
Average 12.2%(4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
BeiersdorfAnheuser-BuschL'Oréal
++
+
–
++++++–
AverageCFROI14.8%(4)
+49%
TTSSRR RRAANNKKIINNGG
10%
20%
3020
80Anheuser-Busch
L’Oréal
Hermès BeiersdorfGallaher
TiffanyLoblaw
Weston George
Pernod-Ricard
Pernod-Ricard
Hermès Intl.
SyscoWeston GeorgeLoblaw
Tiffany & Co.Gallaher
Sysco
Loblaw
Weston George
BeiersdorfL'OréalPernod-Ricard
Tiffany & Co.Hermès Intl.
Gallaher Group
Anheuser-Busch
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 63 companies; minimum market value 2002: $5B(4) Simple average of total industry sample Source: BCG analysis
57
Beiersdorf
Heineken
BeiersdorfReckitt BenckiserHeineken
CintasGeneral Mills
Sysco
Tiffany & Co.Gallaher
-10 0 10 403020
100
60
40
20
0
-20
Average
39.5%(3)
Average 13.6% (3)
Sysco
II
I
III
IV
80
1997
40%
60%
100
1999
39%
61%
114
2002
56%
44%
167
2003(2)
53%
47%
168
11%-3%3%
57%-19%-15%21%
2%4%
10%
62%34%54%60%54%40%63%39%55%56%
26286
13928
-54174216
-48787
1,257
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+5%
+10%
Value option portfolio
5-YEAR TBR RANKING
SyscoGallaher GroupReckitt BenckiserTiffany & Co.CintasHeinekenAvon ProductsGen. MillsBeiersdorfPepsico
123456789
10
USUKUKUSUSNLUSUSDEUS
23%21%
8%22%12%13%14%
8%23%
5%
31%24%23%23%22%22%22%21%21%20%
21,2135,922
13,7725,4386,318
12,83015,25017,540
9,60979,085
+++++
++++
++–+++
+––
++–++++
++
++
++––+
+++–++
+–+––+
+++–+
++
CONSUMER GOODS
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Cash flow margin asset productivity 2002versus
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
++
+
–
++++++–
+8%
TTBBRR RRAANNKKIINNGG
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
+18%
Cintas
GallaherTiffanyGeneral
Mills
Beiersdorf
Pepsico HeinekenAvon
Reckitt Benckiser
0
Asset turn 2002
Cash flow margin 2002 (%)
5.0
4.0
3.0
2.0
1.0
0 5 10 15 20 25
Average1.4%(4)
Average 12.2%(4)
AverageCFROI14.8%(4)
10%
20%
Sysco
Tiffany & Co. Gallaher Group
Pepsico
Avon ProductsAvon Products
Pepsico
General Mills
Cintas
Renckitt Benckiser
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 63 companies; minimum market value 2002: $5B(4) Simple average of total industry sample Source: BCG analysis
58
BouygesVinci
SiamCement Assa Abloy
PoscoAmerican Standards
DanaherGeneral Dynamics
Rio Tinto
Impala Platinum
-10 0 10 403020
60
40
20
0
-20
-40
Average
11.9%(3)
Average 14.8% (3)
II
I
III
IV
1997
87%
13%
100
1999
67%
33%
163
2002
22%
78%
200
2003(2)
23%
77%
205
12%64%13%
-13%20%13%
-31%7%0%
18%
58%42%
-16%5%1%
53%7%
28%38%32%
238147-89
-391-3719
1131067
-67
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+12%
-6%
Value option portfolio
5-YEAR TSR RANKING
Impala PlatinumSiam CementPoscoBouyguesVinci (ex SGE)DanaherAssa AbloyRio TintoGeneral DynamicsAmerican Standards
123456789
10
ZATHKRFRFRUSSEUKUSUS
71%38%24%23%22%16%15%15%15%13%
20%7%
11%4%
17%25%11%12%15%16%
4,5095,151
10,1037,9335,453
11,3122,706
22,01215,395
6,088
++–+++
++++++
+++++
+
+++–++
++++
++–+
++++––––+–
++–
++++–++–+–––
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
2.5
2.0
1.5
1.0
0.5
0 5 10 15 25 35
Average
1.0%(4)
Average 11.0% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
++
+
–
++++++–
AverageCFROI 8.7%(4)
+102%
5%
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
+12%
DanaherImpala Platinum
American StandardsGeneral Dynamics
Vinci
Posco
Bouygues
Siam Cement
Rio TintoAssa Abloy
INDUSTRIAL GOODS, ENGINEERING & RAW MATERIALSTTSSRR RRAANNKKIINNGG
20 30
15%
VinciAmerican Standards
Bouygues
General Dynamics
DanaherAssa Abloy
Impala Platinum
Rio TintoSiam Cement
Posco
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 55 companies; minimum market value 2002: $3B(4) Simple average of total industry sample Source: BCG analysis
59
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
26%57%33%13%12%20%27%18%-2%3%
42%32%-3%53%58%
1%-11%32%29%46%
189-243205
19238-37
-636-67
-275-192
United TechnologiesCentexCRHDanaherImpala PlatinumVinci (ex SGE)Cemex American StandardsParker HannifinIllinois Toolworks
123456789
10
USUSIEUSZAFRMXUSUSUS
13%10%
6%16%71%22%
8%13%
2%3%
29%27%26%25%20%17%17%16%16%15%
36,2304,8108,458
11,3124,5095,4539,4456,0885,282
20,399
+++
++++++
+++++++
++++
+++++
–+––
––––
+++–+–––
––+–
++++––––
1997
63%
37%
100
1999
59%
41%
152
2002
76%
24%
190
2003(2)
70%
30%
213
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+19%+17%
-9%
Value option portfolio
5-YEAR TBR RANKING
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
++
+
–
++++++–
+30%
INDUSTRIAL GOODS, ENGINEERING & RAW MATERIALS TTBBRR RRAANNKKIINNGG
-10 0 10 403020
Average
11.9%(3)
Average 14.8% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
60
40
20
0
-20
-40
Danaher
United Technologies
Centex
Vinci
CRH
Cemex
American Standards
Parker Hannifin
Illinois Toolworks Impala Platinum
0
Asset turn 2002
Cash flow margin 2002 (%)
2.5
2.0
1.5
1.0
0.5
0 5 10 15 25 35
Average
1.0%(4)
Average 11.0% (4)
AverageCFROI 8.7%(4)
5%
20 30
15%
VinciAmerican Standards
DanaherImpala Platinum
Cemex
Illinois Toolworks
United Technologies
CRHParker Hannifin
Centex
American StandardsCentex, CemexParker HannifinIllinois Toolworks
Vinci
United Technologies
Impala Platinum
Danaher
CRH
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 55 companies; minimum market value 2002: $3B(4) Simple average of total industry sample Source: BCG analysis
60
-10 0 10 403020
80
40
20
0
-20
-80
Average
17.4%(3)
Average 3.6%(3)
II
I
III
IV
1997
63%
37%
100
1999
41%
59%
192
2002
36%
64%
190
2003(2)
38%
62%
199
8%17%24%17%
0%15%
7%20%39%20%
31%45%
-26%-145%
47%81%46%
-13%51%
-11%
3.817-69
3,8671,6624,404
82-1,368
641-2,1511,530
TSR1 Jan–
30 Sept. '03
EP30 Sept. '03
AVE in M$'98–'02
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+11%
-15%
Value option portfolio
5-YEAR TSR RANKING
# Company
AflacRASPower FinancialFidelityAIGMediolanumTransatlanticOld RepublicProgressiveRadian
123456789
10
Country
USITCAUSUSITUSUSUSUS
Ø TSR'98–'02
20%12%10%
9%9%8%8%5%5%5%
12%4%
28%35%13%13%-2%11%
0%32%
16,6039,2239,7254,048
150,5324,2043,7283,998
15,0144,155
Ø TBR'98–'02
MV in M$30 Sept. '03
+76%
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
+16%
Mediolanum
INSURANCETTSSRR RRAANNKKIINNGG
60
-40
-60
AIGRAS
Progressive
Trans-atlantic
Aflac
Old Republic Radian
Power Financial
Fidelity
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 56 companies; minimum market value 2002: $3B Source: BCG analysis
61
Mediolanum
Aflac
Old Republic Radian
Power Financial
Fidelity
AIG
80
40
20
0
-20
-80
60
-40
-60
-10 0 10 403020
Average
17.4%(3)
Average 3.6% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
17%20%24%17%18%
0%15%19%
8%20%
-145%-11%-26%67%31%47%81%23%31%
-13%
1,6621,5303,867
572-578
4,40482
-1413,817
641
TSR1 Jan–
30 Sept. '03
EP30 Sept. '03
AVE in M$'98–'02
# Company
FidelityRadianPower FinancialAlleanzaHartfordAIGMediolanumJefferson-PilotAflacOld Republic
123456789
10
Country
USUSCAITUSUSITUSUSUS
Ø TSR'98–'02
9%5%
10%-2%1%9%8%4%
20%5%
35%32%28%19%13%13%13%12%12%11%
4,0484,1559,7257,345
14,863150,532
4,2046,293
16,6033,998
Ø TBR'98–'02
MV in M$30 Sept. '03
1997
60%
40%
100
1999
40%
60%
190
2002
68%
32%
178
2003(2)
64%
36%
186
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+13%+17%
-21%
Value option portfolio
5-YEAR TBR RANKING
+68%
INSURANCE TTBBRR RRAANNKKIINNGG
Jefferson-Pilot
Hardford
Alleanza
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 56 companies; minimum market value 2002: $3B Source: BCG analysis
62
2.5
2.0
1.5
1.0
0.5
0
-10 0 10 3020
80
40
20
0
-20
-80
Average
25.1%(3)
Average 20.1% (3)
II
I
III
IV
1997
85%
15%
100
1999
47%
53%
226
2002
27%
73%
290
2003(2)
28%
72%
304
72%4%
19%-6%
-19%11%
4%11%12%-9%
69%69%35%16%62%
-72%30%58%48%54%
276-34
-145-3,692
-2311442-3460
-99
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+12%
-13%
Value option portfolio
5-YEAR TSR RANKING
Echostar CommunicationsTF1Publicis GroupeViacomWestwood OneMediasetMcGraw-Hill Scripps (EW) OmnicomWashington Post
123456789
10
USFRFRUSUSITUSUSUSUS
60%25%23%15%15%12%12%11%10%10%
1%17%17%
2%17%
9%22%13%16%12%
15,4255,7304,834
72,4203,0339,743
11,8795,304
13,6545,190
++++++++++
++++
+++–+
++++
+++++
–––
+++–––––+–––
+++––––
+++++
–––
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
5 10 15 20 55
Average0.9%(4)
Average 14.1% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
++
+
–
++++++–
AverageCFROI10.2%(4)
+181%
6%
18%
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
+26%
MEDIA & ENTERTAINMENTTTSSRR RRAANNKKIINNGG
60
-40
-60
McGraw-Hill
Echostar
Viacom
Mediaset
TF1Westwood
Washington PostScripps
Omnicom
PublicisGroupe
TF1, Publicis Groupe,Viacom, Westwood,Scripps,Washington Post
McGraw-Hill
Mediaset
Echostar
Omnicom
TF1
Omnicom
McGraw-Hill
Mediaset
Westwood One
Scripps
Viacom
Publicis Groupe
Washington Post
Echostar
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 42 companies; minimum market value 2002: $3B(4) Simple average of total industry sample Source: BCG analysis
63
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
2.5
2.0
1,5
1.0
0.5
0 0
Asset turn 2002
Cash flow margin 2002 (%)
5 10 15 20 55
Average0.9%(4)
Average 14.1% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
++
+
–
++++++–
AverageCFROI10.2%(4)
6%
18%TF1 Publicis GroupeWestwoodDaily MailUnivision
McGraw-HillEmap
WoltersKluwer
Omnicom
Thomson
Emap
Daily Mail
Wolters Kluwer
Thomson
Univision
McGraw-Hill
Omnicom
TF1Westwood
-10 0 10 3020
80
40
20
0
-20
-80
Average
25.1%(3)
Average 20.1% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
60
-40
-60
-23%4%
-7%4%
19%-19%30%
1%12%
6%
10%30%37%69%35%62%68%33%48%35%
81442
0-34
-145-2
-163463
60211
Wolters KluwerMcGraw-Hill Daily Mail&generalTF1Publicis GroupeWestwood OneUnivision CommunicationsThomsonOmnicomEmap
123456789
10
NLUSUKFRFRUSUSCAUSUK
-10%12%
4%25%23%15%
7%4%
10%-1%
23%22%20%17%17%17%17%17%16%15%
3,65711,879
3,6665,7304,8343,0338,082
16,94513,654
3,195
+++++++
+++++
+
–++
+–+
++–
+++–+
++–––––––
+++
++++
–––––
++–
+++
1997
60%
40%
100
1999
43%
57%
156
2002
62%
38%
152
2003(2)
59%
41%
159
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+30%+12%
-13%
Value option portfolio
5-YEAR TBR RANKING
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
+21%
MEDIA & ENTERTAINMENT TTBBRR RRAANNKKIINNGG
WoltersKluwer
Daily Mail
Thomson
EmapPublicis Groupe
Univision
TF1
Omnicom
McGraw-Hill
Westwood One
Publicis Groupe
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 42 companies; minimum market value 2002: $3B(4) Simple average of total industry sample Source: BCG analysis
64
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
-10 0 10 3020
90
50
30
10
-10
Average
18.6%(3)
Average 14.1% (3)
II
I
III
IV
1997
57%
43%
100
1999
55%
45%
128
2002
33%
67%
117
2003(2)
33%
67%
123
-24%5%
-1%-3%14%
5%31%24%36%20%
80%38%51%
8%63%-6%
-100%38%27%
2%
3949-7
-149213
55212176620
-1,851
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+12%
-13%
Value option portfolio
5-YEAR TSR RANKING
WiproWesfarmersITT IndustriesBarloworld3MSime DarbyCSRFortune BrandsItochuHutchison Whampoa
123456789
10
INAUUSNZUSMYAUUSJPHK
78%21%16%12%11%10%
9%7%5%4%
24%14%
6%23%14%13%
3%12%
8%3%
6,0775,7345,5271,425
54,0823,1531,0618,2424,617
30,888
++++++
–++––––+
+++++++
+++–+–
–+–––––
++––
+++––++
+++++–
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
7.0
2.5
2.0
1.5
1.0
0.5
0 5 10 15 20 30
Average
1.4%(4)
Average 11.3%(4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
Wipro
Wesfarmers3M
BarloworldHutchison Whampoa
++
+
–
++++++–
AverageCFROI8.6%(4)
+15%
4%
14%
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
+3%
MULTIBUSINESSTTSSRR RRAANNKKIINNGG
70
Wipro
3M
WesfarmersITT
Fortune Brands
Barloworld
ItochuCSR
HutchisonWhampoa
Sime Darby
CSR
Sime DarbyFortune BrandsItochu
ITT Industries
25
Itochu
Barloworld
Wipro
CSR
Hutchison Whampoa
3M
Fortune Brands
Sime Darby
ITT Industries
Wesfarmers
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 36 companies; minimum market value 2002: $1B(4) Simple average of total industry sample Source: BCG analysis
65
3M
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
WiproWesfarmers
Wipro
3M
Wesfarmers
Barloworld
-10 0 10 3020
90
50
30
10
-10
Average
18.6%(3)
Average 14.1% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
70
-24%-3%25%
3%18%
6%23%20%14%
5%
80%8%
23%30%35%23%53%30%63%38%
39-149
-4,716-8
-19-100-248
-60213
49
WiproBarloworldGeneral ElectricTeleflexAptargroupImperial Hdg.DoverIndustrivarden3MWesfarmers
123456789
10
INNZUSUSUSZAUSSEUSAU
78%12%
1%4%3%2%
-3%2%
11%21%
24%23%20%19%18%17%16%16%14%14%
6,0771,425
298,6621,7181,3281,4417,1662,434
54,0825,734
+++++++++++
+++
+++––––––++
–––––––––+
++–––––––++
1997
43%
57%
100
1999
44%
56%
178
2002
78%
22%
138
2003(2)
73%
27%
152
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+17% +12%
-33%
Value option portfolio
5-YEAR TBR RANKING
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
+53%
MULTIBUSINESS TTBBRR RRAANNKKIINNGG
Dover
TeleflexAptar
Imperial
Industrivarden
General Electric
0
Asset turn 2002
Cash flow margin 2002 (%)
7.0
2.5
2.0
1.5
1.0
0.5
0 5 10 15 20 30
Average
1.4%(4)
Average 11.3% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
Wipro
Wesfarmers3M
Barloworld, Aptargroup, GE, Dover, Industrivarden, Teleflex, Imperial Hdg.
++
+
–
++++++–
AverageCFROI8.6%(4)4%
14%
25
Imperial Holding
Barloworld
Industrivarden
Dover
Aptargroup
General ElectricTeleflex
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 36 companies; minimum market value 2002: $1B(4) Simple average of total industry sample Source: BCG analysis
66
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
0 10 20 30 405 15 25 35
-20 0 10 4020 30-10
90
50
30
10
-30
Average
24.2%(3)
Average 19.0% (3)
II
I
III
IV
1997
80%20%100
1999
41%
59%
303
2002
51%
49%
426
2003(2)
50%
50%
538
5%0%
22%37%12%34%65%28%35%18%
25%19%27%57%47%62%87%
-10%56%24%
470917056
331-841
90217
80100
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+7%
Value option portfolio
5-YEAR TSR RANKING
Forest LabsIDEC PharmaceuticalsMedimmuneAllerganStrykerAmgenGilead SciencesAltanaSt. Jude MedicalBiomet
123456789
10
USUSUSUSUSUSUSDEUSUS
51%42%31%30%29%29%29%22%21%21%
11%3%0%9%
13%11%-5%32%28%24%
18,7785,1758,252
10,57014,95182,70911,284
8,0159,7338,589
++++++++
–+++
++++
+++
++
+++++++++
++–
+++++
++
+++–+
+++++
–+++
+++
++++
+++++
+++–
++++++
++
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
Asset turn 2002
Cash flow margin 2002 (%)
3.0
2.5
2.0
1.5
1.0
0.5
0
Average
1.4%(4)
Average 18.0% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++ Forest Labs.Altana
MedimmuneStrykerGilead Sciences
Allergan
St. Jude
Amgen
++
+
–
++++++–
AverageCFROI19.9%(4)
+198%
10%
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
+18%
PHARMACEUTICAL & BIOTECHTTSSRR RRAANNKKIINNGG
70St. Jude Medical
Biomet
Altana
Gilead
Amgen
Medimmune
IDECForest Labs
StrykerAllergan
+25%
Biomet IDEC30%
Forest Labs.Medimmune
Biomet
IDECAmgen
St. JudeStryker
Gelead Sciences
Altana Allergan
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 43 companies; minimum market value 2002: $5B(4) Simple average of total industry sample Source: BCG analysis
-10
67
0 10 20 30 405 15 25 35
90
50
30
10
-30
70
-10
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Biomet
Altana
-20 0 10 4020 30-10
Average
24.2%(3)
Average 19.0% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
28%52%35%-7%18%15%-4%4%3%
19%
-10%6%
56%32%24%
-25%17%28%41%32%
217229
802,462
100218
1,828388492
72
AltanaGuidantSt. Jude MedicalJohnson & JohnsonBiometNovo NordiskMerck & Co.Baxter Intl.MedtronicBecton Dickinson
123456789
10
DEUSUSUSUSDKUSUSUSUS
22%0%
21%12%21%
4%3%5%
12%5%
32%30%28%27%24%23%20%19%19%18%
8,01514,576
9,733146,976
8,58910,070
113,33017,05557,088
9,172
+++++
+++++
+++
++++
++++
++++
++++
–
+–++++
++++––
+++–+
++++++–+
1997
54%
46%
100
1999
46%
54%
138
2002
67%
33%
147
2003(2)
74%
26%
141
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+17%+16%
-13%
Value option portfolio
5-YEAR TBR RANKING
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
+17%
PHARMACEUTICAL & BIOTECH TTBBRR RRAANNKKIINNGG
Johnson & Johnson
Medtronic
Becton Dickinson
Novo Nordisk
Guidant
Merck & Co.
Baxter
Asset turn 2002
Cash flow margin 2002 (%)
3.0
2.5
2.0
1.5
1.0
0.5
0
Average
1.4%(4)
Average 18.0% (4)
Guidant
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++ Altana
St. Jude, Novo Nordisk, Merck & Co., Baxter, Becton
++
+
–
++++++–
AverageCFROI19.9%(4)
10%
Biomet
GuidantMedtronic
30%
BiometSt. Jude
AltanaMerck & Co.
MedtronicNovo Nordisk
Becton Dickinson
Baxter
Johnson & Johnson
Johnson & Johnson
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 43 companies; minimum market value 2002: $5B(4) Simple average of total industry sample Source: BCG analysis
St. Jude Medical
68
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
1.5
1.0
0.5
-10 0 10 4020 30
40
-20
-40
-60
-80
Average
-10.5%(3)
Average 16.1%(3)
II
I
III
IV
1997
118%
-18%
100
1999
-8%
108%
124
2002
116%
-16%
166
2003(2)
111%
-11%
171
31%-18%106%
27%196%
-1%74%-1%21%79%
4%-24%
-1%8%
35%-19%
-1%-11%-31%28%
-126-770
855
225
48-1,194
137
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TSR RANKING
Votorantim CeluloseSappiSuzanoUnipapelKlabinSvenska CellulosaCMPCUPM-KymmeneHolmenShandong Chenming
123456789
10
BRZABRESBRSECLFISECN
44%40%25%20%18%15%15%15%14%14%
24%12%27%17%15%17%19%15%
6%-4%
7402,556
419146933
7,4762,9997,8532,261
831
+++–+
++++
+–
+++
+++–
+++–
++++
++–
++–
+–+
+++++
–+––+
++–
++++
+++++–+–
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
0 5 10 15 20 45
Average
0.7%(4)
Average 11.4% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++SuzanoKlabin
Votorantim
UnipapelHolmen
SappiUPM-Kymmene
ShandongChenming
++
+
–
++++++–
AverageCFROI6.7%(4)3%
10%
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
+13%
PULP & PAPERTTSSRR RRAANNKKIINNGG
20
+6%
0Suzano
Unipapel
CMPCHolmen
Klabin
Shandong Chenming
UPM-Kymmene
Sappi
Votorantim Celulose
Svenska Cellulosa
SCACMPC
25 30 35 40
Unipapel
Shandong Chenming
KlabinSuzano
VotorantimCMPC
HolmenUPM-Kymmene
SCA
Sappi
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 42 companies; minimum market value 2002: $0B(4) Simple average of total industry sample Source: BCG analysis
69
1.5
1.0
0.5
0
Asset turn 2002
Cash flow margin 2002 (%)
0 5 10 15 20 45
Average
0.7%(4)
Average 11.4% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++SuzanoKlabin
Votorantim
Unipapel
TembecUPM-Kymmene
++
+
–
++++++–
AverageCFROI6.7%(4)3%
10%
SCACMPC
25 30 35 40
Suzano
Unipapel
CMPC
Klabin
UPM Kymmene
Votorantim Celulose
Svenska Cellulosa
-10 0 10 4020 30
40
-20
-40
-60
-80
Average
-10.5%(3)
Average 16.1% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
20
0
106%31%74%10%27%-1%
-26%196%
-1%16%
-1%4%
-1%43%
8%-19%-17%35%
-11%-10%
85-126
48256
55
-14222
-1,1948
SuzanoVotorantim CeluloseCMPCKimberly-ClarkUnipapelSvenska CellulosaTembecKlabinUPM-KymmeneMayr-Melnhof
123456789
10
BRBRCLUSESSECABRFIAT
25%44%15%
1%20%15%
7%18%15%10%
27%24%19%18%17%17%15%15%15%13%
419740
2,99926,001
1467,476
445933
7,8531,007
++
+++–
++++++
++++++
++++
–+–
+++–+
+++–
+++–+
++–+
+++++
++++–
+++–+
1997
28%
72%
100
1999
67%
33%
125
2002
91%
9%
123
2003(2)
85%
15%
129
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+8%+10%
-34%
Value option portfolio
5-YEAR TBR RANKING
Profitability & growth 1998–2002 Cash flow margin asset productivity 2002versus
+21%
PULP & PAPER TTBBRR RRAANNKKIINNGG
Mayr-Melnhof Tembec
Kimberly-Clark
Unipapel
KlabinSuzano
VotorantimCMPC
UPM-Kymmene
SCA
Mayr-Melnhof
Kimberly ClarkTembec
Mayr-MelnhofKimberly Clark
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 42 companies; minimum market value 2002: $0B(4) Simple average of total industry sample Source: BCG analysis
70
-10 0 10 5020 30
80
20
10
0
-10
Average
34.7%(3)
Average 16.1% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
50
40
97%156%
11%32%-4%39%11%
6%-1%27%
26%87%48%12%51%47%58%41%40%27%
29690
162105294574
1,3275442
239
Best BuyAmazon.ComBed Bath & BeyondCDW Computer CentersKohlsLowe'sWal Mart StoresWoolworthsWilliams SonomaAutozone
123456789
10
USUSUSUSUSUSUSAUUSUS
31%30%29%27%27%26%21%21%21%19%
13%-1%41%21%30%20%18%20%12%20%
15,37919,22611,314
4,76618,16240,781
244,0206,7433,1508,011
++++++++++++++++++
++++
+++++
+++
++++++++
–+++
–+++
–––––
+++
–+++
++++
++–+–
++
1997
43%
57%
100
1999
77%
23%
321
2002
44%
56%
271
2003(2)
45%
55%
310
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+30%+18%
-15%
Value option portfolio
5-YEAR TSR RANKING
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
10
8
6
4
2
0 10 15
Average2.8%(4)
Average 6.0% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++AmazonCDW
Autozone
Woolworths
Wal MartBest BuyWilliams Sonoma
++
+
–
++++++–
AverageCFROI15.5%(4)
+108%
10%
30
70
60
40
AmazonWoolworths
Wal Mart Kohls
Bed Bath & BeyondLowe's
Autozone
Williams Sonoma
Best Buy
CDW Computer
RETAILTTSSRR RRAANNKKIINNGG
Bed Bath & BeyondKohlsLowe's
5
20%
CDW Computer Centers
Best Buy
Bed Bath & Beyond
Woolworths
AmazonWal Mart Autozone
KohlsLowe'sWilliams Sonoma
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 53 companies; minimum market value 2002: $3B(4) Simple average of total industry sample Source: BCG analysis
71
Company value index (1)
0
Asset turn 2002
Cash flow margin 2002 (%)
10
8
6
4
2
0 10 15
Average2.8%(4)
Average 6.0%(4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++ CDW
Walmex Home Depot
Ross StoresDixonsStaples
++
+
–
++++++–
AverageCFROI15.5%(4)
10%
20%
Bed Bath & BeyondKohlsStarbucks
5
RETAIL TTBBRR RRAANNKKIINNGG
1997
37%
63%
100
1999
77%
23%
265
2002
67%
33%
161
2003(2)
62%
38%
200
+27%+22%
-36%
+81%
Kohls
Bed Bath & Beyond
CDW Computer
-10 0 10 5020 30
80
20
10
0
-10
Average
34.7%(3)
Average 16.1% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
50
40
30
70
60
401997 1999 2002 2003(2)
11%-4%34%-2%41%30%36%56%32%10%
48%51%28%-7%70%50%61%23%12%
8%
162294
1,3901
4727
-28183105
64
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TBR RANKING
Bed Bath & BeyondKohlsHome DepotDixons GroupStarbucksStaplesWalmexNextCDW Computer CentersRoss Stores
123456789
10
USUSUSUKUSUSMXUKUSUS
29%27%
5%2%
16%8%7%5%
27%19%
41%30%28%24%24%23%22%21%21%21%
11,31418,16275,400
4,21511,26311,68713,408
4,9884,7663,526
++++++
+++++++++++
++
+++++
+++––++++–
––––+––
++++++
–
+++–+–+
++++++
–
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Cash flow margin asset productivity 2002versus
Starbucks
Walmex
Staples
Home Depot
DixonsNext
Ross Stores
Bed Bath & Beyond
Kohls
Next
CDW Computer Centers
Ross Stores
DixonsStaples
Walmex
StarbucksHome Depot
Next
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 53 companies; minimum market value 2002: $3B(4) Simple average of total industry sample Source: BCG analysis
72
0 5 10 15 25 3520 30
-20 0 10 4020 30
80
20
0
-20
Average
21.5%(3)
Average 16.4% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
40
25%-20%15%
-11%4%6%
25%12%20%39%
39%0%
51%-18%34%10%55%54%68%72%
2,8311,018
4912,012
818248251
-532-40
-339
Samsung ElectronicsSK TelecomQualcommNokiaOracleBCEDellSTMicroelectronicsMaxim Integrated ProductsApplied Materials
123456789
10
KRKRUSFIUSCAUSFRUSUS
58%45%43%31%24%22%21%15%14%12%
10%11%
5%25%18%
2%19%
1%-1%
-14%
50,85512,93833,61366,36961,09916,86887,38519,71513,36430,868
+++++
++++++
++++
+++
+++++++
–++++++
–+––
+++–
+++––––––
+++++++++++
++––––
1997
68%32%
100
1999
79%
21%
587
2002
74%
26%
270
2003(2)
66%
34%
294
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+34% +18%
-47%
Value option portfolio
5-YEAR TSR RANKING
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
Cash flow margin asset productivity 2002versus
Asset turn 2002
Cash flow margin 2002 (%)
Average 16.1% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++ SK Telecom
Samsung Electronics
BCE
STMMaxim IntegratedApllied Mats.
Dell
++
+
–
++++++–
AverageCFROI11.9%(4)
+284%
6%
18%
60Dell
TECHNOLOGYTTSSRR RRAANNKKIINNGG
-10
Oracle
NokiaSamsung Electronics
BCE
SK Telecom
STMicroelectronics
Qualcomm
Maxim Integrated
Applied Materials
QualcommNokia
Oracle
6
5
4
3
2
1
0
Average1.0%(4)
NokiaDell
Samsung Electronics
Applied Mats.
OracleQualcomm
STMBCE
Maxim Integrated
SK Telecom
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 49 companies; minimum market value 2002: $10B(4) Simple average of total industry sample Source: BCG analysis
73
NokiaDell
-20 0 10 4020 30
80
20
0
-20
Average
21.5%(3)
Average 16.4%(3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
40
60 Dell
-10
TECHNOLOGY TTBBRR RRAANNKKIINNGG
1997
50%
50%
100
1999
72%
28%
319
2002
71%
29%
178
2003(2)
78%
22%
180
+33%+13%
-39%
+115%
1997 1999 2002 2003(2)
8%-11%14%42%
-14%25%
4%-7%
-15%71%
48%-18%25%51%
0%55%34%22%15%31%
-3432,012
320376
-5,407251818
-365-7,2261,292
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TBR RANKING
MicrosoftNokiaTelstraSAPVerizon Comms.DellOracleAlltelSBC CommunicationsNextel
123456789
10
USFIAUDEUSUSUSUSUSUS
10%31%
9%-4%0%
21%24%
7%-4%-2%
37%25%22%21%20%19%18%16%15%15%
300,62966,36934,39234,79290,90287,38561,09914,73073,95019,508
+++
+++
++++
++++
++
––
++++–
+++––
+++
–+++
–––––––
++
–+++
–+––+––
+++
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Cash flow margin asset productivity 2002versus
Microsoft
OracleSAPTelstra
AlltelSBC
NextelVerizon
Nokia
Company value index (1)
0 5 10 15 25 3520 30
Asset turn 2002
Cash flow margin 2002 (%)
Average 16.1% (4)
Oracle
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
Microsoft, Telstra, Verizon, Alltel, SBC Dell
++
+
–
++++++–
AverageCFROI11.9%(4)6%
18%
NokiaNextel
OracleSAP
6
5
4
3
2
1
0
Average1.0%(4)SAP
NextelVerizon
SBCAlltel
MicrosoftTelstra
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 49 companies; minimum market value 2002: $10B(4) Simple average of total industry sample Source: BCG analysis
74
0 5 10 15 20 25 30 35 40
-10 0 10 4020 30
70
20
10
-20
Average
-10.7%(3)
Average 6.2% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
40
22%3%
-14%6%
20%14%
7%8%
23%27%
49%38%35%48%45%46%21%
1%-1%3%
3-15235238
699
-221107743
Toll HoldingPatrick Corp.RyanairExpeditor Intl.CH Robinson Kowloon Motor Bus.Harrah's EntertainmentCanadian National RailwayCentral Japan RailwayCathay Pacific
123456789
10
AUAUIEUSUSHKUSCAJPHK
66%64%44%28%24%22%16%16%14%14%
28%22%28%19%18%22%14%
4%4%5%
1,3151,3494,6153,6903,2711,9314,7278,490
17,0835,608
++++
+++++++++
+++++
+++
+++++
++
+++
++–
++
–––
+++––+–++
++–
++––+++
++
1997
-4%
104%
100
1999
93%
7%
124
2002
95%
5%132
2003(2)
91%
9%
140
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+5%
+3%
-9%
Value option portfolio
5-YEAR TSR RANKING
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
Cash flow margin asset productivity 2002versus
Asset turn 2002
Cash flow margin 2002 (%)
11
5
4
3
2
1
0
Average0.8%(4)
Average 14.3% (4)
CH Robinson
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
Cathay Pacific Expeditor
Patrick Corp.CNRCJR
RyanairCH Robinson
++
+
–
++++++–
Avg. CFROI7.5%(4)
2.5% 12.5%
60
TRAVEL, TRANSPORT & TOURISMTTSSRR RRAANNKKIINNGG
Toll
0
30
50
-10
Ryanair
Expeditor
Patrick Kowloon Motor
CH Robinson
Harrah's Entertainment
Canadian National Railway
Central Japan Railway
Cathay Pacific
Toll HoldingHarrah's
Kowloon Motor
6
45
Expeditor
Toll Holding
Patrick Corp.
Harrah's EntertainmentCathay Pacific
Central Japan Railway
Kowloon MotorRyanairCanadian National Railway
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 75 companies; minimum market value 2002: $1B(4) Simple average of total industry sample Source: BCG analysis
75
CH Robinson
Expeditor
Toll Holding
Patrick Corp.
Kowloon MotorR anairy
TollRyanair
Expeditor
Patrick Corp.Kowloon Motor
CH Robinson
-10 0 10 4020 30
70
20
10
-20
Average
-10.7%(3)
Average 6.2%(3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
40
60
0
30
50
-10
TRAVEL, TRANSPORT & TOURISM TTBBRR RRAANNKKIINNGG
1997
54%
46%
100
1999
54%
46%
167
2002
70%
30%
195
2003(2)
61%
39%
232
+20%
+21%
+13%
+39%
1997 1999 2002 2003(2)
-14%22%11%
3%14%
6%33%11%20%19%
35%49%37%38%46%48%49%
4%45%41%
233
-213-15
652
-141-191
38-188
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TBR RANKING
RyanairToll HoldingAbertisPatrick Corp.Kowloon Motor Bus.Expeditor Intl.CarnivalMGM MirageCH Robinson Fedex
123456789
10
IEAUESAUHKUSUSUSUSUS
44%66%
6%64%22%28%-1%13%24%12%
28%28%23%22%22%19%19%18%18%15%
4,6151,3156,1701,3491,9313,690
21,3185,5393,271
19,219
++++++
++
+++++
++
++++
++++
++++
+–
++++
–––––
+++––––
–+–+–
++–+––
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Cash flow margin asset productivity 2002versus
Company value index (1)
CarnivalFedex
Abertis
MGM Mirage
0 5 10 15 20 25 30 35 40
Asset turn 2002
Cash flow margin 2002 (%)
11
5
4
3
2
1
0
Average0.8%(4)
Average 14.3% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
Expeditor
Patrick Corp.MGM Mirage
RyanairCH Robinson
++
+
–
++++++–
Avg. CFROI7.5%(4)
2.5%12.5%
Toll Holding
Kowloon Motor
6
45
Fedex Carnival
MGM Mirage
AbertisAbertisCarnivalFedex
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 75 companies; minimum market value 2002: $1B(4) Simple average of total industry sample Source: BCG analysis
76
-10 0 10 3020
50
25
-50
Average
-23.7%(3)
Average 10.9% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
24%7%9%
-13%22%21%-5%
-17%17%17%
12%-2%5%4%
-36%-14%
8%-4%2%
-13%
-268107404
-376-273181
1-350-403-583
ExelonSouthernCentricaNational Grid TranscoEntergyPPLScot. & Southern EnergyDTE EnergyDominion Res.Union Fenosa
123456789
10
USUSUKUKUSUSUKUSUSES
20%18%15%13%13%12%12%12%11%10%
17%5%
24%4%7%
26%17%10%
8%10%
21,05021,56412,84719,54212,333
7,2898,4156,267
20,0744,470
+–
+++++
++++++
––+–
++++
––
++–
–––––+++–+
––+––+––––
1997
-10%
110%
100
1999
104%
116
2002
108%
-8%
186
2003(2)
102%
201
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TSR COMPANIES
Company value index (1)
Expectation premium Fundamental value CAGR
+5%
+18%
Value option portfolio
5-YEAR TSR RANKING
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TSR COMPANIES
Cash flow margin asset productivity 2002versus
0
Asset turn 2002
Cash flow margin 2002 (%)
2.5
2.0
1.5
1.0
0.5
0 10 20 30 40 50
Average0.4%(4)
Average 21.7% (4)∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
Southern
CentricaPPL
Exelon, National Grid, Entergy, DTE Energy, Dominion, Union Fenosa
Scot. & Southern Energy
++
+
–
++++++–
Avg. CFROI6.7%(4)3%
10%
UTILITIESTTSSRR RRAANNKKIINNGG
0
-25
Centrica
Scot. & Southern Energy
Exelon
Entergy
National GridSouthern
DTE Energy
Dominion Union Fenosa
PPL-4% -2%
Scot. & Southern Energy
ExelonUnion Fenosa
DTE EnergyEntergy
DominionNational GridPPL
Southern
Centrica
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 57 companies; minimum market value 2002: $3B(4) Simple average of total industry sample Source: BCG analysis
77
Centrica
Scot. & Southern Energy
Exelon
PPL
-10 0 10 3020
50
25
-50
Average
-23.7%(3)
Average 10.9% (3)
II
I
III
IV
Fundamental performance p.a. (TBR) 1998–2002 (%)
Expectation premium 2002 (%)
0
-25
UTILITIES TTBBRR RRAANNKKIINNGG
1997
76%
24%
100
1999
79%
21%
116
2002
96%
4%160
2003(2)
94%
6%
171
+20%
+21%
+13%
+39%
1997 1999 2002 2003(2)
21%9%7%7%
34%-5%5%
24%8%
13%
-14%5%
-10%13%11%
8%46%12%-5%24%
181404
-464-322
182
-268-450-210
Fundamental value and expectation premium
FUNDAMENTAL VALUE ANALYSIS OF TOP 10 TBR COMPANIES
Expectation premium Fundamental value CAGR
Value option portfolio
5-YEAR TBR RANKING
PPLCentricaElectrabelHong Kong ElectricMDU ResourcesScot. & Southern EnergyHK & China GasExelonFPL GroupCLP Holdings
123456789
10
USUKBEHKUSUKHKUSUSHK
12%15%
6%5%8%
12%5%
20%4%3%
26%24%21%19%18%17%17%17%16%16%
7,28912,84713,667
8,1692,5858,4157,526
21,05011,68810,500
+++
++
+++++
++++
++++
++++––––+
+–
++–+++–––
+++–+–+–––
Profitability & growth 1998–2002
VALUE LEVER PERFORMANCE OF TOP 10 TBR COMPANIES
Cash flow margin asset productivity 2002versus
Company value index (1)
CLP
HK & China Gas
HK Electric
FPL
MDUElectrabel
0
Asset turn 2002
Cash flow margin 2002 (%)
2.5
2.0
1.5
1.0
0.5
0 10 20 30 40 75
Average0.4%(4)
Average 21.7%(4)
CLP Holdings
∆ CFROI 1998–2002
Gross investment growth p.a. 1998–2002
+++
CentricaMDU
PPLElectrabelHK & China Gas
ExelonHK ElectricFPLCLP
Scot. & Southern Energy
++
+
–
++++++–
Avg. CFROI6.7%(4)3%
10%
Scot. & Southern Energy
Exelon
Centrica
PPL HK & China GasHK Electric
FPL
Electrabel
MDU
TSR1 Jan.–
30 Sept. '03
EP30 Sept. '03
CVA in M$'98–'02
No. Company CountryAvg. TSR'98–'02
Avg. '98–'02
TBR MV in M$30 Sept. '03
Avg. GI CFM AP CFROI
Contribution of each value lever
(1) Market value of equity plus interest-bearing debt, 1997 = 100(2) Estimated fundamental value using I/B/E/S consensus forecast data; market value as of 30 September 2003(3) Weighted average of total sample; 57 companies; minimum market value 2002: $3B(4) Simple average of total industry sample Source: BCG analysis
1. Background to the study
The study is based on the annual returns of more than4,000 companies in Datastream's global marketindices for the period 1998–2002. Collectively, theyrepresent around 70% of the world's total market capi-talization. Businesses were selected from Datastream'sdatabase using three main criteria:
● Have uninterrupted stock exchange listing for atleast five years.
● Satisfied minimum market capitalization hurdles:different capitalization hurdles were set for eachsector and region to reflect their relative econom-ic weight (see Figures A1–A2).
● Could be classified into one of fourteen industrialsectors.
● Free float of shares exceeding 25%.
Several companies meeting these criteria were exclud-ed from the final sample as they had been involved inmajor mergers or acquisitions over the study period(1998–2002), and it was believed this would distort thefindings. All financial figures were converted into U.S.dollars, using the exchange rate as of year end 2002.
2. Different ways to measure value creation
To effectively manage value creation, companies re-quire multiple measures to be used in different applica-tions and at different levels of the organization. FigureA3 depicts the range of measures our clients havefound most useful to manage value creation at differentlevels in the organization.
78
Appendix
Figure A1
Source: Thomson Financial Datastream; BCG analysis
MMAARRKKEETT CCAAPPIITTAALLIIZZAATTIIOONN HHUURRDDLLEESS FFOORR EEAACCHH IINNDDUUSSTTRRYY
TechnologyBanksConsumer goods
Ind. goods, engineering & raw materialsInsuranceRetail
UtilitiesMultibusinessAutomotiveChemicalsTravel, transport & tourism
Pharmaceutical & health care
Media & entertainment
Pulp & paper
Cumulated market capitalization (B$)
2,873
2,506
2,113
1,722
977
812
755
743
677
494
486
390
371
97
0 500 1,000 1,500 2,000 2,500 3,000
Minimum market capitalization applied
$0B$1B
$3B$5B
$10B
TECHNICAL NOTES
79
Appendix
Figure A2
Source: Thomson Financial Datastream; BCG analysis
MMAARRKKEETT CCAAPPIITTAALLIIZZAATTIIOONN HHUURRDDLLEESS FFOORR EEAACCHH RREEGGIIOONN
World
North America
Europe
Asia-Pacific
Cumulated market capitalization (B$)
17,367
9,169
4,959
3,239
0 5,000 10,000 15,000 20,000
Minimum market capitalization applied
$5B$7.5B
$10B
Figure A3
FFRRAAMMEEWWOORRKK OOFF VVAALLUUEE MMEEAASSUURREESS
Management applications Relevant measures
Set company value creation aspirationsLink to senior management incentives
Assess gap between aspirations and plansCascade aspirations down to BUsUse for long-term BU incentivesDetermine targets for other measures
Determine priority value driversEvaluate value driver + tradeoffsDirectionally signal value creation improvementDecompose aspirations into operating metricsUse for annual incentives
Benchmark operating efficiencySet departmental prioritiesUse for departmental incentives
Profitability of assets Growth in assets
∆ CVA
TBR
TSR
Fundamental value creation
External value creation
Measure against most relevant
assets: capital, people, customers
Primary value drivers
Cash margin Asset turns
KPIs KPIs
Setting explicit external aspirations: TSRBeginning at the corporate level, executives must set anexplicit value-creation aspiration that will energize theirorganizations, drive thinking or performance, and focusthe agenda of programs that must be implemented. Webelieve the most appropriate measure for aspirationsetting is total shareholder return (TSR) relative to alocal market index or industry peer group. Achievingthis "external value-creation aspiration" should beembedded within the incentive plans for corporateexecutives and key business-unit leaders.
Aligning internal aspirations and plans: TBRThe next requirement is to cascade down the overallTSR value-creation aspiration into internal corporateand business-unit goals and targets and assess the gapbetween plans and aspirations at all levels. The TotalBusiness Return (TBR) measure is an accurate and use-ful measure for this purpose (Fig. A4). The TBR meas-ure is an internal mirror of actual external TSR. It rep-resents the 'intrinsic' capital gain and dividend yieldfrom a business plan—either at the corporate or busi-ness-unitlevel.
Many of our clients have found the TBR measure to bea powerful tool for converting TSR aspirations into per-formance goals at business-unitlevel and to driveaccordingly a portion of long term incentives for busi-ness-unit management. In that context, TBR can also beused as a rich planning tool to assess the value-cre-ation potential of business plans and help managersclose the gap between aspirations and performance.
TBR is an important high level tool to assess the relativeperformance of a corporation or a business unit and toset future targets. It also provides a way to link othermeasures used for detailed value-driver analysis or forsetting operational targets back to the TSR aspiration.
Measuring and setting targets for the internalvalue-creation drivers: CVACash Value Added, CVA (or its financial services equiv-alent AVE—Added Value to Equity), is an absolutemeasure of operating performance contribution tovalue creation. It provides a strong directional indica-tion of when and how value creation is being improved.The CVA measure reflects operating cash flow minus a
80
Appendix
Figure A4
Change in equity value is analogous to share price, and free cash flow is analogous to dividends
Estimate of public or private companyHistorical or forecastRequires estimated value
TTBBRR IISS TTHHEE IINNTTEERRNNAALL AANNAALLOOGG TTOO TTSSRR
Internal measure
Change in estimated equity value
Equity free cash flow
TBR
Stock market observed by public companyHistorical onlyRequires share price
External measure
Change in share price Dividends
TSR
High correlation
cost of capital charge against gross operating assetsemployed. The CVA measure is a very powerful tool tohelp managers pull the appropriate levers to createvalue. It can indeed accurately assess the contributionof the economic assets that actually drive a business. Insome cases they are tangible assets, in others they areeither people or customers.
The CVA measure is an accurate tool for determining pri-ority value drivers and assessing value-driver trade-offs.In particular, it is a useful strategic indicator that allowsmanagers to balance the high level trade-offs betweenimproving profitability versus growing the business.Because its measurement is based on cash flow andoriginal cash investment, it avoids the key accountingdistortions that can cause profit-oriented residual incomemeasures to give misleading trends in capital-intensivebusinesses.
Many clients have also found CVA to be an effectivemeasure for annual incentives at the business-unit andoperational levels. Moreover, CVA can easily be brokendown further into the key performance indicators (KPIs)
that are relevant to each management area. KPIs formthe basis for internal or external performance bench-marking and for establishing annual incentive targets.
This brief description of value-creation measurementtools does not address the many nuances of applyingthem effectively. Further information on how to quantifyaspirations, tailor the measure to fit your type of busi-ness, or identify the highest priority KPIs, can be pro-vided upon request
3. Calculating expectation premiums
A company's expectation premium is the differencebetween its market value plus debt and its fundamentalvalue. The scale of the premium depends on threemain factors:
● The market value of the company, meas-ured by its market capitalization plus inter-est-bearing debt: BCG used calendar yeardata for this (Fig. A5).
Appendix
Figure A5
HHOOWW EEXXPPEECCTTAATTIIOONN PPRREEMMIIUUMMSS AARREE CCAALLCCUULLAATTEEDD
Evaluation method/source
Current performance discounted to perpetuity
Fundamental value = current performance +future expectations
Value of "current operations"
Expectation premium = market value -
fundamental valueI
Present value of additional cash flow due to growth and profitability using BCG "fade model"
Result Market capitalization + debt
Value of growth of "current
operations"
Expectation premium
Market value of the company
II
III
81
● Robustness of the valuation model: FigureA6 demonstrates that over the five-year periodfrom 1998–2002 the difference between theannual market performance and the annual fun-damental performance was between +/-10% forthree quarters of the companies in the sample.
● The assumptions used to calculate the com-pany's fundamental value: BCG applied astandardized residual income valuation frame-work incorporating cash flow projections, basedon the businesses' current profitability and histori-cal growth. Within this framework the presentvalue of a company is derived by adding up cap-ital invested in the business and the amount ofdiscounted future residual income (i.e., paymentsurpluses after deducting a capital charge on thecapital invested). As empirical evidence suggests,it is virtually impossible for top companies to sus-tain superior profitability and growth for decadesdue to competitive pressures. Similarly, firms thatgenerate a lower return on capital than investorsexpect will either have to catch up quickly, be
taken over, or exit the market. To account forthese competitive pressures, BCG employed sec-tor-specific fade rates that converge the business-es' profitability and growth to an industry average,based on empirical evidence from each sector.Within each industry profitability fade rates differfor companies that exceed their required rate ofreturn (WACC) and firms that fall short of thismeasure. (Fig. A7).
● The data used to calculate the company'sfundamental value. BCG used fiscal data forthis.
82
Appendix
Figure A6
Market TSR and fundamental TBR grow with same speed
Expectation premiumis shrinking
Expectation premium is growing
Annual market performance (TSR) – annual fundamental performance (TBR) 1998 to 2002 (%)
Note: Analysis based on top 721 companies of the total sampleSource: BCG analysis
NNOORRMMAALL DDIISSTTRRIIBBUUTTIIOONN DDEEMMOONNSSTTRRAATTEESS RROOBBUUSSTTNNEESSSS OOFF VVAALLUUAATTIIOONN MMOODDEELL
% of companies
0.0 0.0 0.62.5
4.3
10.4
15.5
20.919.3
12.3
6.9
2.1 1.80.7 0.4 0.8 0.4 0.4
-45 -40 -35 -30 -25 -20 -15 -10 -5 0 5 10 15 20 25 30 35 40 45
0.0
83
Appendix
Gradient of curves are determined by industry-specific fade rate
Fade table starts with current growth rate
Growth fade-to-rate equals nominal long-term economic growth
Fade down: pressure from competition
Fade up: pressure from
investors
CFROI fade-to-rate equals WACC(3)
Assumed sustainability (2)
Figure A7
(1) Fade rates vary according to industry and profitability level (CFROI > WACC or CFROI < WACC)(2) If CFROI > WACC, profitability is kept to a certain extent above cost of capital, (3) Nominal WACC/cost of equity is calculated for a given year and then assumed to be constantSource: BCG analysis
sustainability rates vary across industries
GGRROOWWTTHH AANNDD PPRROOFFIITTAABBIILLIITTYY FFAADDEESS TTOO IINNDDUUSSTTRRYY AAVVEERRAAGGEESS
FADE RATE ASSUMPTIONS
Growth
Growth
Time
Gradient of curves are specified by fade rate (1)
Fade table starts with today's CFROI
Fade down: pressure from competition
Fade up: pressure from
investors
Profitability
CFROI
Time
The Corporate Finance and Strategy practice withinBCG provides expertise in the areas of corporate strat-egy, mergers and acquisitions, post merger integrationand shareholder value-management. In specific theseareas comprises the following tools and approaches:
Strategy:
● Portfolio approach: review business performanceand potential pathways to shape long-term devel-opment potentials
● Standardized tools: Scenario planning, war gam-ing and industry landscaping to reveal risks andprospects
● Business unit strategy: assessing market condi-tions, competition, BU-specific capabilities todrive operational excellence
● Partnering tactics for joint venture opportunitiesand alliances
● Defining the role of the center
● Corporate governance: conceptual work oneffective board practices
Corporate Finance
● Navigating the M&A process: acquisition search,target assessment in terms of financial valuationand strategic fit, negotiation & bid support as wellas post-merger integration and change manage-ment
● IPO assistance for all phases: conceptual,preparatory, announcement, book building andpost-IPO period
● Financial engineering and tools: capital alloca-tion, valuation, risk management techniques, bal-ance sheet restructuring, accounting issues
● Credit rating: rating models, rating management
Shareholder Value Management
● Corporate processes: business procedures organ-ized for value creation, budgeting and controlling
● Value based management: defining appropriatemetrics, to be broken down into operational valuedriver, counsel on suitable target setting andincentives
● Addressing capital markets: understandinginvestor characteristics & strategy, communicationconcept, managing the P/E
84
Appendix
HOW BCG CAN HELP
85
Appendix
6
88
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