Sustainable Growth Model Valuation Process
Sustainable Competitive Advantages
Select companies that consistently have an advantage over their competitors. This advantage or advantages can be due to a superior product or service, a good brand, high switching costs, outstanding management and corporate culture or other reasons. Companies that have a sustainable competitive advantage are significantly more likely to be able to grow earnings per share.
Prudent Steward of Capital
The company has exhibited a history of adding value through any combination of the following: Dividends, Share buybacks, Debt repayments or reinvesting in the business. Dividends return cash to investors and can often be a tangible sign that the company has good free cash flow and is adding value. Share buybacks reduce the number of outstanding shares and “increase each investors slice of the pie”.
flexibility and diminishes the chance that the company will have to make poor decisions due to a liquidity problem. This also enables the company to take advantage of opportunities when competitors may be focusing on survival.
Quality Management Teams
Often one company is able to distinguish itself from competitors by having good management. Management’s direction permeates throughout the company and contributes to all aspects of the business. Over long periods of time good management and corporate culture are often a key competitive advantage.
Purchase these companies when they are trading at a discount to fair value and add a margin of safety consistent with the level of risk inherent with the industry.
Long Term View
The analysis is designed to select securities that will outperform on a risk adjusted basis over a three to five year time horizon. This leads to lower trading costs and avoids high tax rates on short term capital gains.