Life Cycles of
Companies...Mature Companies (Large Caps)
These stocks have
long periods of operating and market history, with established patterns of
investment and financing. But not all long standing practice is good and it is
possible that changing the way these companies are run can make a difference in
creating higher stock values. They might be more valuable if they used more
debt to fund themselves or value could be increased by spinning out some of the
company’s divisions as separate entities. See my blog on ‘resource
conversion’…
If growth companies
get the bulk of their value from growth assets, mature companies must get the
bulk of their value from existing investments.
The common characteristics of mature companies are:
Revenue growth is approaching growth rate in the economy.
Margins are established: The exception being cyclical or commodity firms.
Diverse competitive advantages: Some mature firms will see their excess returns go to zero and below while others will retain a significant competitive advantage (brands etc...)
Debt capacity: With more cash available for servicing debt, debt capacity should increase for mature firms, though there can be big differences in how firms react to this surge in debt capacity.
Cash build-up and return: As earnings improve and reinvestment needs drop off, mature companies will be generating more cash from their operations than they need. If these companies do not pay more dividends, cash balances will start accumulating in these firms.
Acquisition-driven growth: As companies get larger, their internal investments have less effect on their growth rates. To remedy this they will often attempt to acquire other companies as a way to boost revenues and earnings. This does not however always add value.
Not all mature companies are large companies. Many small companies reach their growth ceiling quickly and essentially stay on as small mature firms.
The key to valuing mature companies is assessing the potential increase in value from changing the way they are run (resource conversion and corporate restructuring), these changes can be categorized into three groups: changes in operations, changes in financial structure, and changes in non-operating assets.
to be continued...
Resources
The Little Book of Valuation
Aswath Damodaran
The common characteristics of mature companies are:
Revenue growth is approaching growth rate in the economy.
Margins are established: The exception being cyclical or commodity firms.
Diverse competitive advantages: Some mature firms will see their excess returns go to zero and below while others will retain a significant competitive advantage (brands etc...)
Debt capacity: With more cash available for servicing debt, debt capacity should increase for mature firms, though there can be big differences in how firms react to this surge in debt capacity.
Cash build-up and return: As earnings improve and reinvestment needs drop off, mature companies will be generating more cash from their operations than they need. If these companies do not pay more dividends, cash balances will start accumulating in these firms.
Acquisition-driven growth: As companies get larger, their internal investments have less effect on their growth rates. To remedy this they will often attempt to acquire other companies as a way to boost revenues and earnings. This does not however always add value.
Not all mature companies are large companies. Many small companies reach their growth ceiling quickly and essentially stay on as small mature firms.
The key to valuing mature companies is assessing the potential increase in value from changing the way they are run (resource conversion and corporate restructuring), these changes can be categorized into three groups: changes in operations, changes in financial structure, and changes in non-operating assets.
to be continued...
Resources
The Little Book of Valuation
Aswath Damodaran
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