Value Investing: Predicting Long-Term Profitability Based on Fundamental Data
Value Investing: Predicting Long-term Profitability Based on Fundamental Data
An Empirical Study in the Manufacturing Industry
by Vital Schwander (05-609-136)
Master’s Thesis
supervised by Prof. Dr. Andreas Grüner
University of St.Gallen
May 23, 2011
Master in Law & Economics
Abstract
Warren Buffett (1992) classifies the discussion about value and growth stocks as fuzzy thinking. With that statement, he argues that value investors must consider growth in their value calculations. This thesis shows in a first step that growth is only valuable if the company enjoys a durable competitive advantage. By examining the fundamental characteristics of companies with a durable competitive advantage, this thesis intends in a second step to assess the predictability of long-term profitability. The DuPont Identity serves as framework for that purpose. The objects of this investigation are companies within the manufacturing industry (Primary SIC Code between 2000-3999) that were listed in the United States between 1979 and 2009. The results show that companies with a durable competitive advantage exhibit specific characteristics in operating efficiency, asset use efficiency, and in the ability to meet short-term obligations. Furthermore, the thesis shows that long-term profitability, based on the investigated characteristics, is predictable to some extent. This thesis concludes by assembling the insights to a value strategy that is applied to manufacturing companies listed in Switzerland. The strategy exhibits an outstanding SMI-adj. compound annual growth rate of 13.19% over a period of 17.5 years.
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Acknowledgement
I would like to express my gratitude to Prof. Dr. Andreas Grüner for supervising this thesis and his assistant Lucia Ehn for her conceptual advices. I have furthermore to thank Mr. Hans Ulrich Jost for giving me insight into the daily business of a value fund at UBS AG. My sister Daria introduced me to R and Latex. I want to thank her for her
An Empirical Study in the Manufacturing Industry
by Vital Schwander (05-609-136)
Master’s Thesis
supervised by Prof. Dr. Andreas Grüner
University of St.Gallen
May 23, 2011
Master in Law & Economics
Abstract
Warren Buffett (1992) classifies the discussion about value and growth stocks as fuzzy thinking. With that statement, he argues that value investors must consider growth in their value calculations. This thesis shows in a first step that growth is only valuable if the company enjoys a durable competitive advantage. By examining the fundamental characteristics of companies with a durable competitive advantage, this thesis intends in a second step to assess the predictability of long-term profitability. The DuPont Identity serves as framework for that purpose. The objects of this investigation are companies within the manufacturing industry (Primary SIC Code between 2000-3999) that were listed in the United States between 1979 and 2009. The results show that companies with a durable competitive advantage exhibit specific characteristics in operating efficiency, asset use efficiency, and in the ability to meet short-term obligations. Furthermore, the thesis shows that long-term profitability, based on the investigated characteristics, is predictable to some extent. This thesis concludes by assembling the insights to a value strategy that is applied to manufacturing companies listed in Switzerland. The strategy exhibits an outstanding SMI-adj. compound annual growth rate of 13.19% over a period of 17.5 years.
ii
Acknowledgement
I would like to express my gratitude to Prof. Dr. Andreas Grüner for supervising this thesis and his assistant Lucia Ehn for her conceptual advices. I have furthermore to thank Mr. Hans Ulrich Jost for giving me insight into the daily business of a value fund at UBS AG. My sister Daria introduced me to R and Latex. I want to thank her for her
Bibliography: Source Codes 01001, 19101, 19102, 19103, 19104 01051 01101 01151 01251 01551, 19109, 19110, 19111, 19112 01751 04601 02201 03101 03351 03501 Quarter End Quarter End