globalaviationaerospace.com
Putting Conventional Wisdom to Test
A&D Segments Outperformed to S&P 500 over the Past Decade
Top-Quartile Performers Derive Almost All Long-Term Value from Growth
Sources of Value for Top Perfomers in the Sector Are in Line with the Top Quartile of the S&P 500
Commercial and Diversified Players Outperformed Defense-Focused Companies
Asset-Light Companies Are Not Earning the Highest Returns
Analysis on the Performance of Technology Companies with Z-score ModeljournalBEEI
Local technology sector plays a significant role in information and communication technology (ICT) based innovations and applications which enhance organizational performance as well as national economic growth and labor productivity. In this paper, financial performance of the listed Malaysia companies in technology sector is analyzed and evaluated. Altman’s Z-score model is proposed due to its robustness in determining companies’ financial distress level using five financial ratios as variables. The computed Z-score values classify the financial status of the companies into distress, grey and safe zones. This study investigates the financial data of 23 listed technology-based companies in the Main Market of Bursa Malaysia over the period of 2013 to 2017. The findings reveal that the percentage of safe zone companies increase throughout the five years whereas distress zone companies decline. It is concluded that financial ratio for market value of equity to total liabilities is the dominant factor that directly influences the level of financial distress among these technology-based companies in Malaysia. These research outcomes provide an insight to investors or policy makers to develop future planning in order to avoid financial failure in local
technology sector.
Mercer Capital's Investment Management Industry Newsletter | Q2 2021 | Focus:...Mercer Capital
Mercer Capital’s Investment Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
An alternative perspective to EM investing: The case for an industry allocati...Jean Meilhoc Ricaume
Investors have long recognised the compelling opportunity offered by emerging markets equities. Yet while returns from the asset class have considerably outperformed developed markets equities over previous market cycles, they have tended to be more volatile, severely testing investors’ resolve. Rather than attempting to time market allocations, or select regions or specific countries to over- or underweight, we believe that our proprietary emerging markets macro growth indicators and skill in identifying industry performance relative to them may offer investors a differentiated source of returns.
Mercer Capital | A Layperson's Guide to the Option Pricing ModelMercer Capital
Mercer Capital's whitepaper on the option pricing model, often used to value ownership interests in early-stage companies. Developed in response to the need to reliably estimate the value of different economic rights in complex capital structures, the OPM models the various capital structure components as a series of call options on underlying total equity value. Through a detailed example, Travis W. Harms explains key concepts including breakpoints and tranches in a straightforward and non-technical way, taking the mystery out of OPM terms such as “breakpoint” and “tranche”. Relative to the probability-weighted expected return method, the principal strengths of the OPM include the small number of required assumptions and auditability. The PWERM, in contrast, offers greater flexibility and transparency. Harms closes with some thought on reconciling OPM results with the market participant perspective.
Analysis on the Performance of Technology Companies with Z-score ModeljournalBEEI
Local technology sector plays a significant role in information and communication technology (ICT) based innovations and applications which enhance organizational performance as well as national economic growth and labor productivity. In this paper, financial performance of the listed Malaysia companies in technology sector is analyzed and evaluated. Altman’s Z-score model is proposed due to its robustness in determining companies’ financial distress level using five financial ratios as variables. The computed Z-score values classify the financial status of the companies into distress, grey and safe zones. This study investigates the financial data of 23 listed technology-based companies in the Main Market of Bursa Malaysia over the period of 2013 to 2017. The findings reveal that the percentage of safe zone companies increase throughout the five years whereas distress zone companies decline. It is concluded that financial ratio for market value of equity to total liabilities is the dominant factor that directly influences the level of financial distress among these technology-based companies in Malaysia. These research outcomes provide an insight to investors or policy makers to develop future planning in order to avoid financial failure in local
technology sector.
Mercer Capital's Investment Management Industry Newsletter | Q2 2021 | Focus:...Mercer Capital
Mercer Capital’s Investment Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
An alternative perspective to EM investing: The case for an industry allocati...Jean Meilhoc Ricaume
Investors have long recognised the compelling opportunity offered by emerging markets equities. Yet while returns from the asset class have considerably outperformed developed markets equities over previous market cycles, they have tended to be more volatile, severely testing investors’ resolve. Rather than attempting to time market allocations, or select regions or specific countries to over- or underweight, we believe that our proprietary emerging markets macro growth indicators and skill in identifying industry performance relative to them may offer investors a differentiated source of returns.
Mercer Capital | A Layperson's Guide to the Option Pricing ModelMercer Capital
Mercer Capital's whitepaper on the option pricing model, often used to value ownership interests in early-stage companies. Developed in response to the need to reliably estimate the value of different economic rights in complex capital structures, the OPM models the various capital structure components as a series of call options on underlying total equity value. Through a detailed example, Travis W. Harms explains key concepts including breakpoints and tranches in a straightforward and non-technical way, taking the mystery out of OPM terms such as “breakpoint” and “tranche”. Relative to the probability-weighted expected return method, the principal strengths of the OPM include the small number of required assumptions and auditability. The PWERM, in contrast, offers greater flexibility and transparency. Harms closes with some thought on reconciling OPM results with the market participant perspective.
Understand the Value of Your InsurTech CompanyMercer Capital
Valuing an InsurTech company can be complicated and difficult, but carries important significance for employees, investors, and stakeholders for the company. While all InsurTech companies have differences, including what niche (distribution, claims, benefits, etc.) they operate in or what stage of development the company is in, understanding the value of the business is critically important.
Mercer Capital's Asset Management Industry Newsletter | Q3 2012 | Focus: Alte...Mercer Capital
Mercer Capital’s Asset Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
MintKit Growth Index: A Benchmark of the Stock Market for Sprightly Growth at...MintKit Institute
The ideal of investment lies in a robust strategy for high growth at low risk. Granted, a perfect solution could never emerge in an imperfect world such as ours. Even so, certain approaches toward the objective make more sense than others.
By received wisdom, the leading benchmarks of the stock market are cogent and meaningful portraits of the action on the bourse. Sadly, though, the reality differs greatly from the mirage.
For starters, the renowned indexes track the stocks in the prime of their lives rather than the entirety of their lifespans. In the process, the yardsticks gloss over the fact that death is the way of life for all companies along with their equities. The outcome is a grossly distorted picture of the payoff for the entire throng of shareholders over the long range.
Even in the near term, the traditional benchmarks have little or no bearing on the mass of participants. For instance, many an index monitors a group of stocks according to their market caps. While this approach may befit a profile of the bourse as a whole over the short run, the unbalanced scheme has scant relevance to the thoughtful investor who is most unlikely to load up their portfolios according to the market caps of the stocks at hand.
For these and other reasons, the traditional benchmarks are unsuitable as beacons for the investing public. Instead, a worthwhile index should address the true concerns of serious investors in areas ranging from pertinent metrics to workable strategies.
An example of a fruitful scheme involves the equal weighting of stocks within a benchmark. The benefits lie in conceptual elegance as well as practical relevance for the participants. Another drawcard is the tendency of uniform weighting to deliver higher returns compared to the labored scheme based on market caps.
In seeking a trusty path, a basic step is to canvass the timeworn benchmarks in multiplex areas ranging from conceptual soundness and logical rigor to common sense and pragmatic import. The wholesome assay then leads to guidelines for designing trenchant beacons suited to investors in tending their private portfolios. The enhanced framework is showcased by the MintKit Growth Index: a model benchmark geared toward promising stocks poised for zesty growth at modest risk.
The PEO Industry in Transition, by Benjamin Gordon, BGSA CEOBenjamin Gordon
Benjamin Gordon and BGSA write about how the professional employer organization (PEO) industry is evolving. Benjamin outlines mergers, acquisitions, investments, transactions, and strategic change underway in the PEO sector.
Mercer Capital's Investment Management Industry Newsletter | Q1 2019 | Focus:...Mercer Capital
Mercer Capital’s Investment Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
Mercer Capital | Best Practices: Fair Value ManagementMercer Capital
Topics include: Best Practices for Valuing Illiquid Portfolio Assets, Fair Value Measurement, Valuation Methods, Valuing Fund Interests, Mezzanine Loans, GIPS Valuation Hierarchy, International Private Equity and Venture Capital Valuation Guidelines (December 2012), CFA Institute Global Investment Performance Standards (2010)
Mercer Capital's Asset Management Industry Newsletter | Q2 2013 | Focus: Trad...Mercer Capital
Mercer Capital’s Asset Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
Mercer Capital's Asset Management Industry Newsletter | Q1 2018 | Focus: Asse...Mercer Capital
Mercer Capital’s Asset Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
Recruitment process outsourcing; a global growth marketRachel Patton
The Recruitment Process Outsourcing (RPO) market has, over the past decade, greatly benefitted from the dislocations in financial markets caused by the 2007/08 global economic crisis. While corporates lowered headcounts and stripped associated hiring costs in the depths of the crisis, a new dynamic in hiring took prominence as confidence returned to markets. The demand for talent became a business imperative.
However, with the benefits of these ‘passive’ forces now wearing thinner, RPO providers are having to think more creatively and laterally about how they continue to provide value beyond more traditional recruitment arrangements.
In our recent report, we spoke to 10 leading RPO players, along with talent acquisition technology providers and multinational corporates to find out how the RPO model has evolved and their expectations for the next few years.
TandemModels® is delivered to investment managers and advisors in a single platform environment (SaaS) for asset allocation model design and management, trading, cash flow management, portfolio re-balancing, performance reporting, and custodial integration and reconciliation.
Supply Chain Metrics That Matter: A Focus on Aerospace & Defense Companies 2017Lora Cecere
Executive Overview
A concentrated industry with few players, Aerospace & Defense (A&D) is unique. While demand in the Aerospace industry is relatively stable, the Defense Industry is volatile. Driven by technology innovation, success lies in the integration of R&D processes into the end-to-end supply chain. The A&D supply chain is largely a story of supply chain excellence in procurement and sourcing strategies. With a dependency on scarce materials, and sole-sourcing strategies, the industry fights to survive.
Government spending drives the defense supply chain. Companies in this industry compete for government contracts that range from hundreds of millions to billions of dollars. The magnitude of these contracts defines winners and losers for the industry. Demand is lumpy and volatile. Companies such as Lockheed Martin and Boeing have had a long-lasting relationship with the government re defense spending, but they live contract by contract. In contrast, the commercial aircraft side is much different. It is driven by long-term economic trends
Government ups the ante for the latest and best technology for global defense. As the technology in jets, weapons, and missile-defense systems continues to advance, the supply chain becomes more complex with increasing pressures on driving innovation. To better understand the industry in relation to supply chain management, let’s start by looking at it within the larger context of the A&D value network. Growth is increasing, margins are decreasing, and longer cash-to-cash cycles are increasing working capital. In Table 1, we share the trends and metrics progress on the Supply Chain Metrics That Matter. These charts are set up to take a hard look at value chains. To understand the table, let’s take a look at the data. For the period of 2010-2016 the average growth of the industry was 4%. However, if the year-over-year growth rate of 2016 is compared to 2010, the growth rate is down 19% in a year-by -year comparison. The red arrows represent a negative trend while the green arrow represents a positive trend. Notice within this value chain that most of the arrows are red. While the industry is more dependent on software and computer hardware, there has been little collaboration to drive value between trading partners. Also note that this industry has the longest Cash-to-Cash cycles of any that we have studied, and the impact of lengthening payables in government spending resulted in a 12% increase in Cash-to-Cash with an average days of Cash-to-Cash of 152.
Table 1. Industry Overview of Trends for the Period of 2010-2016
In this report, we take a detailed look at elements of the metrics portfolio, and then wrap up with excerpts from annual reports to enable the reader to understand the “voice” of the industry.
Understand the Value of Your InsurTech CompanyMercer Capital
Valuing an InsurTech company can be complicated and difficult, but carries important significance for employees, investors, and stakeholders for the company. While all InsurTech companies have differences, including what niche (distribution, claims, benefits, etc.) they operate in or what stage of development the company is in, understanding the value of the business is critically important.
Mercer Capital's Asset Management Industry Newsletter | Q3 2012 | Focus: Alte...Mercer Capital
Mercer Capital’s Asset Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
MintKit Growth Index: A Benchmark of the Stock Market for Sprightly Growth at...MintKit Institute
The ideal of investment lies in a robust strategy for high growth at low risk. Granted, a perfect solution could never emerge in an imperfect world such as ours. Even so, certain approaches toward the objective make more sense than others.
By received wisdom, the leading benchmarks of the stock market are cogent and meaningful portraits of the action on the bourse. Sadly, though, the reality differs greatly from the mirage.
For starters, the renowned indexes track the stocks in the prime of their lives rather than the entirety of their lifespans. In the process, the yardsticks gloss over the fact that death is the way of life for all companies along with their equities. The outcome is a grossly distorted picture of the payoff for the entire throng of shareholders over the long range.
Even in the near term, the traditional benchmarks have little or no bearing on the mass of participants. For instance, many an index monitors a group of stocks according to their market caps. While this approach may befit a profile of the bourse as a whole over the short run, the unbalanced scheme has scant relevance to the thoughtful investor who is most unlikely to load up their portfolios according to the market caps of the stocks at hand.
For these and other reasons, the traditional benchmarks are unsuitable as beacons for the investing public. Instead, a worthwhile index should address the true concerns of serious investors in areas ranging from pertinent metrics to workable strategies.
An example of a fruitful scheme involves the equal weighting of stocks within a benchmark. The benefits lie in conceptual elegance as well as practical relevance for the participants. Another drawcard is the tendency of uniform weighting to deliver higher returns compared to the labored scheme based on market caps.
In seeking a trusty path, a basic step is to canvass the timeworn benchmarks in multiplex areas ranging from conceptual soundness and logical rigor to common sense and pragmatic import. The wholesome assay then leads to guidelines for designing trenchant beacons suited to investors in tending their private portfolios. The enhanced framework is showcased by the MintKit Growth Index: a model benchmark geared toward promising stocks poised for zesty growth at modest risk.
The PEO Industry in Transition, by Benjamin Gordon, BGSA CEOBenjamin Gordon
Benjamin Gordon and BGSA write about how the professional employer organization (PEO) industry is evolving. Benjamin outlines mergers, acquisitions, investments, transactions, and strategic change underway in the PEO sector.
Mercer Capital's Investment Management Industry Newsletter | Q1 2019 | Focus:...Mercer Capital
Mercer Capital’s Investment Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
Mercer Capital | Best Practices: Fair Value ManagementMercer Capital
Topics include: Best Practices for Valuing Illiquid Portfolio Assets, Fair Value Measurement, Valuation Methods, Valuing Fund Interests, Mezzanine Loans, GIPS Valuation Hierarchy, International Private Equity and Venture Capital Valuation Guidelines (December 2012), CFA Institute Global Investment Performance Standards (2010)
Mercer Capital's Asset Management Industry Newsletter | Q2 2013 | Focus: Trad...Mercer Capital
Mercer Capital’s Asset Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
Mercer Capital's Asset Management Industry Newsletter | Q1 2018 | Focus: Asse...Mercer Capital
Mercer Capital’s Asset Management Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to asset managers, trust companies, and investment consultants.
Recruitment process outsourcing; a global growth marketRachel Patton
The Recruitment Process Outsourcing (RPO) market has, over the past decade, greatly benefitted from the dislocations in financial markets caused by the 2007/08 global economic crisis. While corporates lowered headcounts and stripped associated hiring costs in the depths of the crisis, a new dynamic in hiring took prominence as confidence returned to markets. The demand for talent became a business imperative.
However, with the benefits of these ‘passive’ forces now wearing thinner, RPO providers are having to think more creatively and laterally about how they continue to provide value beyond more traditional recruitment arrangements.
In our recent report, we spoke to 10 leading RPO players, along with talent acquisition technology providers and multinational corporates to find out how the RPO model has evolved and their expectations for the next few years.
TandemModels® is delivered to investment managers and advisors in a single platform environment (SaaS) for asset allocation model design and management, trading, cash flow management, portfolio re-balancing, performance reporting, and custodial integration and reconciliation.
Supply Chain Metrics That Matter: A Focus on Aerospace & Defense Companies 2017Lora Cecere
Executive Overview
A concentrated industry with few players, Aerospace & Defense (A&D) is unique. While demand in the Aerospace industry is relatively stable, the Defense Industry is volatile. Driven by technology innovation, success lies in the integration of R&D processes into the end-to-end supply chain. The A&D supply chain is largely a story of supply chain excellence in procurement and sourcing strategies. With a dependency on scarce materials, and sole-sourcing strategies, the industry fights to survive.
Government spending drives the defense supply chain. Companies in this industry compete for government contracts that range from hundreds of millions to billions of dollars. The magnitude of these contracts defines winners and losers for the industry. Demand is lumpy and volatile. Companies such as Lockheed Martin and Boeing have had a long-lasting relationship with the government re defense spending, but they live contract by contract. In contrast, the commercial aircraft side is much different. It is driven by long-term economic trends
Government ups the ante for the latest and best technology for global defense. As the technology in jets, weapons, and missile-defense systems continues to advance, the supply chain becomes more complex with increasing pressures on driving innovation. To better understand the industry in relation to supply chain management, let’s start by looking at it within the larger context of the A&D value network. Growth is increasing, margins are decreasing, and longer cash-to-cash cycles are increasing working capital. In Table 1, we share the trends and metrics progress on the Supply Chain Metrics That Matter. These charts are set up to take a hard look at value chains. To understand the table, let’s take a look at the data. For the period of 2010-2016 the average growth of the industry was 4%. However, if the year-over-year growth rate of 2016 is compared to 2010, the growth rate is down 19% in a year-by -year comparison. The red arrows represent a negative trend while the green arrow represents a positive trend. Notice within this value chain that most of the arrows are red. While the industry is more dependent on software and computer hardware, there has been little collaboration to drive value between trading partners. Also note that this industry has the longest Cash-to-Cash cycles of any that we have studied, and the impact of lengthening payables in government spending resulted in a 12% increase in Cash-to-Cash with an average days of Cash-to-Cash of 152.
Table 1. Industry Overview of Trends for the Period of 2010-2016
In this report, we take a detailed look at elements of the metrics portfolio, and then wrap up with excerpts from annual reports to enable the reader to understand the “voice” of the industry.
WE BELIEVE that our Eighth Core Portfolio investment strategy provides the answers to the previously mentioned issues and offers a truly balanced approach to investing.
Equities, bonds, real estate and commodities are four asset classes that cover the core of any asset allocation process. The Eighth Core Portfolio is based on the idea that, during any given stage of a global investment cycle, money will flow across these assets, thereby affecting their performance. Rather than time the entry into the outperformer and the exit from the underperformer the Eighth Core Portfolio invests globally across all four in equal measure thereby ensuring that it participates in the best asset class in any environment. Over the investment period a constant exposure is maintained in order to avoid any outperforming asset class becoming a drag when the market turns.
This balanced approach is designed to produce medium to long term returns which exceed those of nominal cash returns. Historical evidence shows that this strategy has had proven outperformance in various timeframes and in all environments (see Tables 1 to 3) More importantly it minimizes volatility by taking advantage of the low correlations between the individual asset classes (see Table 4).
2014 Property & Casualty Insurance Industry Outlook: Innovation leading the wayDeloitte United States
On the surface the property and casualty sector appears to be doing quite well, but running an insurance carrier is rarely smooth sailing. The last few years have been particularly difficult for those occupying C-Suite positions, as more fundamental issues are threatening not only short-term results on their balance sheets, but challenging the long-term viability of their operating models as well.
For example, a growing number of insurers are facing significant organizational disruption. Many have made large-scale investments in technology, replacing core systems for claims, policy administration and finance. Their chief challenge now is how to effectively leverage the new systems they’ve put in place and maintain their momentum with additional innovations in personnel, products and culture.
Additionally, ongoing political gridlock in Washington could undermine an already unsteady economic recovery. Not to mention regulatory uncertainty that makes it difficult for carriers to plan ahead and determine operational priorities.
Innovation may ultimately be the key to keep insurers growing regardless of shifting economic and insurance market conditions, as they devise ways to thwart ongoing and emerging competitive threats as well as capitalize on new opportunities.
For more - visit http://www.deloitte.com/view/en_US/us/Industries/Insurance-Financial-Services/039bdd0819e23410VgnVCM3000003456f70aRCRD.htm
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Mark...Mercer Capital
Mercer Capital's Portfolio Valuation: Private Equity and Venture Capital Marks and Trends Newsletter provides a brief digest and commentary of some of the most relevant market trends influencing the fair value regarding private equity portfolio investments.
The Five Competitive Forces That Shape Strategyby Michael E..docxcherry686017
The Five Competitive Forces That Shape Strategy
by Michael E. Porter
Editor’s Note: In 1979, Harvard Business Review published “How Competitive Forces Shape Strategy” by a young economist
and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In
subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations,
regions, nations, and, more recently, health care and philanthropy. “Porter’s five forces” have shaped a generation of academic
research and business practice. With prodding and assistance from Harvard Business School Professor Jan Rivkin and
longtime colleague Joan Magretta, Porter here reaffirms, updates, and extends the classic work. He also addresses common
misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for
strategy today.
In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition
too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established
industry rivals to include four other competitive forces as well: customers, suppliers, potential entrants, and substitute products.
The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive
interaction within an industry.
As different from one another as industries might appear on the surface, the underlying drivers of profitability are the same. The
global auto industry, for instance, appears to have nothing in common with the worldwide market for art masterpieces or the
heavily regulated health-care delivery industry in Europe. But to understand industry competition and profitability in each of
those three cases, one must analyze the industry’s underlying structure in terms of the five forces. (See the exhibit “The Five
Forces That Shape Industry Competition.”)
The Five Competitive Forces That Shape Strategy - Harvard Business Reviewhttp://hbr.org/2008/01/the-five-competitive-forces-that-shape-strategy/ar/pr
1 of 16 9/23/2013 8:58 AM
If the forces are intense, as they are in such industries as airlines, textiles, and hotels, almost no company earns attractive
returns on investment. If the forces are benign, as they are in industries such as software, soft drinks, and toiletries, many
companies are profitable. Industry structure drives competition and profitability, not whether an industry produces a product or
service, is emerging or mature, high tech or low tech, regulated or unregulated. While a myriad of factors can affect industry
profitability in the short run—including the weather and the business cycle—industry structure, manifested in the competitive
forces, sets industry profitability in the medium and long run. (See the exhibit “Differences in Industry Profitability.”)
Differences in Ind ...
Equity Research 16 December 2002AmericasUnited Stat.docxYASHU40
Equity Research
16 December 2002
Americas/United States
Strategy
Investment Strategy
Assessing the Magnitude and
Sustainability of Value Creation
Illustration by Sente Corporation.
• Sustainable value creation is of prime interest to investors who seek to
anticipate expectations revisions.
• This report develops a systematic way to explain the factors behind a
company’s economic moat.
• We cover industry analysis, firm-specific analysis, and firm interaction.
Investors should assume that CSFB is seeking or will seek investment banking or other business from the covered
companies.
For important disclosure information regarding the Firm's ratings system, valuation methods and potential conflicts of interest,
please visit the website at www.csfb.com/researchdisclosures or call +1 (877) 291-2683.
research team
Michael J. Mauboussin
212 325 3108
[email protected]
Kristen Bartholdson
212 325 2788
[email protected]
Measuring the Moat 16 December 2002
2
Executive Summary
• Sustainable value creation has two dimensions—how much economic profit a
company earns and how long it can earn excess returns. Both are of prime interest to
investors and corporate executives.
• Sustainable value creation is rare. Competitive forces—including innovation—drive
returns toward the cost of capital. Investors should be careful about how much they
pay for future value creation.
• Warren Buffett consistently emphasizes that he wants to buy businesses with
prospects for sustainable value creation. He suggests that buying a business is like
buying a castle surrounded by a moat—a moat that he wants to be deep and wide to
fend off all competition. According to Buffett, economic moats are almost never stable;
competitive forces assure that they’re either getting a little bit wider or a little bit
narrower every day. This report seeks to develop a systematic way to explain the
factors that determine a company’s moat.
• Companies and investors use competitive strategy analysis for two very different
purposes. Companies try to generate returns above the cost of capital, while investors
try to anticipate revisions in expectations for financial performance that enable them to
earn returns above their opportunity cost of capital. If a company’s share price already
captures its prospects for sustainable value creation, investors should expect to earn
a risk-adjusted market return.
• Studies suggest that industry factors dictate about 10-20% of the variation of a firm’s
economic profitability, and that firm-specific effects represent another 20-40%. So a
firm’s strategic positioning has a significant influence on the long-term level of its
economic profits.
• Industry analysis is the appropriate place to start an investigation into sustainable
value creation. We recommend getting a lay of the land—understanding the players, a
review of profit pools, and industry stability—followed ...
A Coordinated, Risk-based Approach to Improving Global Aviation SafetySeda Eskiler
globalaviaitonaerospace.com
Regional Accident Statistics
Analysis of Harmonized Accidents
Harmonized Accident Categories
Accidents by Region of Occurrence
Aerospace & Defense Report 2014 in ReviewSeda Eskiler
globalaviationaerospace.com
Aerospace & Defense Industry Trends
Top Commercial Primes
Commercial and Military MRO
Global Defense Spending
Aerospace & Defense M&A Activity
Consolidation
Select Acquisitions by Leading A&D Industry Players
European Joint Ventures
Private Equity
Global M&A
Global M&A by Segment
Defense M&A
Recent Notable Defense M&A Deals Defense
Highlighted Transactions
Precision Castparts Corp. Acquires Aerospace DynamicsTransaction
Alliant Techsystems Inc. Merges with Orbital Sciences Corp.
Cobham plc Acquires Aeroflex Holding Corp..
Engility to Acquire TASC from KKR and General Atlantic
Highlighted Platforms
Bombardier CSeries
Terminal High Altitude Area Defense
Northrop Grumman Global Hawk
Airbus A320neo
globalaviaitonaerospace.com
The global business
The UK opportunity
Innovation in aircraft
Innovation in flight operations
Innovation in components and materials
globalaviationaerospace.com
Using Market Understanding to Drive Efficient Innovation
Starting with A Market-Driven Strategy
Improving Your Innovation Performance
Using A StrongInnovation Culture toWin and Keep Talent
Developing A Strong Ecosystem
Commercialising Innovation
Where Nextfor YourBusiness?
Phoenix Sky Harbor International Aviation SymposiumSeda Eskiler
globalaviationaerospace.com
Air Travel Irritants of Global Frequent Travelers
Ratio of Airline Loyalty Program Members to Annual
Passengers
Weekly Operations by Aircraft Size
Available Seat Miles and Passengers per Employee
Total Employees and Average Wages or Salaries
Pilot and Technician Outlook
Service Fees and Ticket Revenue
Distribution Costs per ASM
Based on Average Cost and Revenue for US Carriers
Monthly Scheduled Departures by Alliance and by Region
Big Data Analytics for Commercial aviation and AerospaceSeda Eskiler
globalaviationaerospace.com
An opportunity for insight in the changing commercial aerospace business
Vision for New Applications of Analytic Insight in Commercial Aerospace
Benefit of Big Data Analytics for the Airline Operator
Modern, Mobile Experience
Big Data Analytics In Action
Predictive Analytics To Prevent Engine Events
Predictive Analytics Improves Safety and Quality
Predictive Analytics Keeps More Planes in the Air
3.0 Project 2_ Developing My Brand Identity Kit.pptxtanyjahb
A personal brand exploration presentation summarizes an individual's unique qualities and goals, covering strengths, values, passions, and target audience. It helps individuals understand what makes them stand out, their desired image, and how they aim to achieve it.
An introduction to the cryptocurrency investment platform Binance Savings.Any kyc Account
Learn how to use Binance Savings to expand your bitcoin holdings. Discover how to maximize your earnings on one of the most reliable cryptocurrency exchange platforms, as well as how to earn interest on your cryptocurrency holdings and the various savings choices available.
buy old yahoo accounts buy yahoo accountsSusan Laney
As a business owner, I understand the importance of having a strong online presence and leveraging various digital platforms to reach and engage with your target audience. One often overlooked yet highly valuable asset in this regard is the humble Yahoo account. While many may perceive Yahoo as a relic of the past, the truth is that these accounts still hold immense potential for businesses of all sizes.
Event Report - SAP Sapphire 2024 Orlando - lots of innovation and old challengesHolger Mueller
Holger Mueller of Constellation Research shares his key takeaways from SAP's Sapphire confernece, held in Orlando, June 3rd till 5th 2024, in the Orange Convention Center.
Understanding User Needs and Satisfying ThemAggregage
https://www.productmanagementtoday.com/frs/26903918/understanding-user-needs-and-satisfying-them
We know we want to create products which our customers find to be valuable. Whether we label it as customer-centric or product-led depends on how long we've been doing product management. There are three challenges we face when doing this. The obvious challenge is figuring out what our users need; the non-obvious challenges are in creating a shared understanding of those needs and in sensing if what we're doing is meeting those needs.
In this webinar, we won't focus on the research methods for discovering user-needs. We will focus on synthesis of the needs we discover, communication and alignment tools, and how we operationalize addressing those needs.
Industry expert Scott Sehlhorst will:
• Introduce a taxonomy for user goals with real world examples
• Present the Onion Diagram, a tool for contextualizing task-level goals
• Illustrate how customer journey maps capture activity-level and task-level goals
• Demonstrate the best approach to selection and prioritization of user-goals to address
• Highlight the crucial benchmarks, observable changes, in ensuring fulfillment of customer needs
Implicitly or explicitly all competing businesses employ a strategy to select a mix
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2. The Boston Consulting Group (BCG) is a global
management consulting firm and the world’s
leading advisor on business strategy. We partner
with clients from the private, public, and not-for-
profit sectors in all regions to identify their
highest-value opportunities, address their most
critical challenges, and transform their enterprises.
Our customized approach combines deep insight
into the dynamics of companies and markets with
close collaboration at all levels of the client
organization. This ensures that our clients achieve
sustainable competitive advantage, build more
capable organizations, and secure lasting results.
Founded in 1963, BCG is a private company with
82 offices in 46 countries. For more information,
please visit bcg.com.
3. June 2015
Greg Mallory, Matt Aaronson, Philippe Plouvier, Kieran Culligan, and Hady Farag
Aerospace and Defense
Value Creators Report 2015
Myths and Realities
4. 2 Aerospace and Defense Value Creators Report 2015
AT A GLANCE
Senior aerospace and defense executives face critical questions about value
creation. By analyzing total shareholder return (TSR) data, they can separate fact
from myth and do a better job of deploying cash, assets, and other resources.
The Sector Outperformed the Overall Market
In the past three, five, and ten years, aerospace and defense companies in all
regions delivered greater shareholder value than the SP 500.
Growth Is the Most Important Factor in Value Creation
Revenue expansion is the single biggest—and margin expansion a lesser—factor in
TSR. This effect is most pronounced for the industry’s top performers. In the past
three years, growing investor multiples have led to value creation as well.
Asset Reductions Don’t Always Produce Top-Tier Returns
Companies in the sector—particularly prime OEMs have taken steps to reduce
their asset intensity (that is, the amount of assets needed to generate a dollar of
revenue) over the past decade. The companies that generate the highest returns,
however, retain (and effectively manage) moderate asset levels.
5. The Boston Consulting Group 3
The past decade has seen substantial evolution in the aerospace and defense
landscape. There have been wars followed by troop drawdowns, budget seques-
tration in the U.S., a boom in commercial aviation, and ongoing changes in the
industry’s structure. As management teams look toward the next decade and
beyond, they are asking fundamental questions about portfolios and cash deploy-
ment, including the following:
•• Should we return cash to shareholders or invest in growth?
•• Would balanced exposure to both defense and commercial segments create
more value during the aerospace and defense business cycle?
•• Would reducing the asset base lead to greater returns and value?
•• Are suppliers creating more value from their positions on platforms than
prime OEMs?
Answering these questions requires separating the sector’s conventional value-
creation wisdom from myths that have gained currency during the past several
decades. To separate myth from fact—and empirically answer these questions for
management teams—we analyzed the financial performance of 51 publicly traded
companies whose business is predominately in the aerospace and defense sector.1
Although each company in the sample has its own idiosyncratic value-creation
story, there are instructive patterns that show how segments have performed.
In particular, the total shareholder return (TSR) comparisons reveal how each seg-
ment’s performance is affected by its relative exposure to commercial aerospace
and defense customers and its position in the value chain. This analysis considers
TSR to assess how well companies have delivered value to shareholders over the
past business cycle.2
Putting Conventional Wisdom to the Test
Many analysts, shareholders, and even industry insiders subscribe to a set of beliefs
about the aerospace and defense industry that have become virtual articles of faith.
The TSR data that The Boston Consulting Group has compiled and analyzed offers
the opportunity to test those beliefs against empirical data. In doing so, we have
been able to demonstrate that some beliefs are grounded in fact, but others are
myths that hinder understanding of the sector and its sources of value creation.
We review these beliefs and offer our verdict on their accuracy.
As management
teams look toward
the next decade and
beyond, they are
asking fundamental
questions about
portfolios and
cash deployment.
6. 4 Aerospace and Defense Value Creators Report 2015
Aerospace and defense companies have outperformed the broader market over the
short, medium, and long term. Fact. Companies in the sector have created more
value than the overall market throughout the aerospace and defense business cycle.
In the ten-year period from 2005 through 2014, the aerospace and defense sector
generated 12.1 percent in annual TSR, compared with 9.7 percent by the SP 500.
This trend of strong sector performance holds across three-year and five-year peri-
ods, as well as across the defense, commercial, and diversified segments of aero-
space and defense companies over all the time periods we studied. (In addition, al-
though BCG’s TSR data extends only as far back as 2004, our analysis of other
metrics shows that, in terms of value creation, the industry has been performing
better than the overall market for more than 20 years.) In terms of segments, com-
panies focused on commercial segments created slightly more shareholder value
than defense-focused peers—12.4 percent annualized versus 11.6 percent—over
the past ten years. (See Exhibit 1.)
The myth that value creation in aerospace and defense companies cannot keep
pace with the overall equity market is especially prevalent in Europe. This is be-
cause of a misperception that the defense market is depressed and companies in
the sector are subject to extensive government oversight that influences corporate
governance. Although barriers do exist—in Europe and elsewhere—companies on
average have sustained a high level of value creation across all regions.
In the long run, growth is the most important source of value creation for aero-
space and defense companies. Fact. For the period we analyzed, revenue growth
was the source of more than half of the sector’s long-term value creation, as it was
Ten-year median TSR, by segment (2005–2014)
Median TSR (%)
SP 500 Commercial Diversified
Aerospace and defense segments
Defense
0
5
10
15
9.7
12.4 12.3
11.6
Sources: Capital IQ; BCG ValueScience Center.
Exhibit 1 | All Aerospace and Defense Segments Outperformed the
SP 500 over the Past Decade
7. The Boston Consulting Group 5
for companies in the SP 500. In terms of contribution to value creation over the
long term, growth trumps margin improvement, valuation multiple, and cash
returns to shareholders.
Notably, revenue growth has driven nearly two-thirds of the TSR of top-quartile
performers in aerospace and defense over the past ten years, while margin im-
provement has driven much of the remainder. Capital deployment, dividends, and
share repurchases have been only small contributors. (See Exhibits 2 and 3.) By con-
trast, during the same period, median-performing companies derived about 15 per-
cent of their value creation from financial policy and saw no contribution from
multiple expansion.
The takeaway is clear: over the long term, revenue growth—followed by margin
expansion—is the key driver of value creation. Yet growth can destroy value if it
comes at too high a price. Among the companies we analyzed are a few that have
grown during the cycle but nonetheless posted TSR numbers that trail the median.
These “growing value destroyers” tell a cautionary tale: low-value growth carries a
high risk of amplifying investor concerns regarding strategy.
The primacy of growth as the long-term value-creation driver has major implica-
tions, particularly for companies in the increasingly challenging defense market. In
the current environment, companies must find and capture growth in both their
core businesses and adjacent markets. However, many in the defense segment are
pursuing similar strategies, such as international growth, or are focusing on a few
adjacent commercial spaces. Competition in these pockets of growth is intense, and
growth will be difficult.
1 year
(2014)
30 31
21
Average contribution to TSR (%)
10
0
20
30
40
5 years
(2010–2014)
Multiple Margin improvement Revenue growthFree cash flow
10 years
(2005–2014)
Sources: Capital IQ; BCG ValueScience Center.
Note: The one-year, five-year, and ten-year averages include top-quartile performers.
Exhibit 2 | Top-Quartile Performers Derive Almost All Long-Term Value
from Growth
8. 6 Aerospace and Defense Value Creators Report 2015
In the short term, multiple expansion is an important source of value creation. In
the past five years, multiples have risen, indicating high expectations from inves-
tors. To meet these expectations and maintain their current valuation multiples,
companies will need a clear strategy and strong communication with institutional
investors over the next three to five years. BCG’s smart-multiple methodology em-
pirically identifies the drivers of valuation multiples—that is, how investors view
the future prospects of companies in the sector. This methodology explains roughly
80 percent of the variation in multiples for a given segment, and it provides critical
insights for companies seeking to improve their value-creation performance.
Players with substantial exposure to both the defense and commercial-customer
segments perform better than single-focus players over the long run. Myth. Over
the cycle, a company’s target end user (commercial aerospace or defense) has not
been a major determinant of value creation. The differences are small: companies
with mostly commercial-customer exposure performed slightly better than diversi-
fied players over the past decade. During that period, pure defense players trailed
by less than 1 percentage point of TSR per year. (See Exhibit 4.)
Customer focus made a much bigger difference in the value creation performance
of tier two suppliers. Diversified tier-two suppliers posted a median annual ten-year
TSR of 13 percent, well behind the 18 percent that commercially focused tier-two
suppliers generated over the same period. (Our sample contains no tier-two suppli-
ers focused exclusively on defense customers.)
Suppliers further up the value chain have higher margins than prime OEMs. Fact.
Tier two players, which supply components and subsystems to tier one players and
Average contribution to TSR,
2005–2014 (%)
25
21
15
20
15
10
5
0
Aerospace and
defense top quartile
SP 500 top quartile
Multiple Margin improvement Revenue growthFree cash flow
Sources: Capital IQ, BCG ValueScience Center.
Exhibit 3 | Sources of Value for Top Performers in the Sector Are in
Line with the Top Quartile of the SP 500
9. The Boston Consulting Group 7
prime OEMs, have margins on earnings before interest and taxes that are 10 per-
centage points higher than prime OEM margins, and 7 points higher than those of
tier one suppliers. Factors that contributed to this disparity over the past decade in-
clude intellectual property related to design and manufacture, risk-sharing partner-
ships, access to aftermarket profits, long-term contracts, and the ability to serve mul-
tiple programs and regions.
There is some indication that the pendulum is starting to swing: the margins of tier
two suppliers contracted in 2014. Prime OEMs and tier one suppliers are increasing-
ly competing on affordability. With an average two-thirds of a platform’s cost struc-
ture consisting of supplied materials, cost pressure will shift to tier two suppliers
through improved negotiating, dual sourcing, insourcing, and restructuring after-
market arrangements. These dynamics have the potential to significantly shift the
distribution of profit pools within the value chain.
Of the industry’s subsegments, prime OEMs are the superior value creators over the
long run. Myth. The value creation performance of aerospace and defense compa-
nies varied widely during the past ten years, but of the 13 companies in the top
quartile of value creation, only two were prime OEMs. Prime OEMs were the weak-
est value creators, generating a median TSR of 8 percent from 2005 through 2014,
compared with 12 percent for tier one suppliers and 13 percent for tier two suppli-
ers. A pattern has emerged over the past decade: the further a company is from the
end customer, the greater that company’s ability to create value for shareholders.
A drive by prime OEMs to reduce assets and become “asset light” has rendered
them less asset intensive than tier one and tier two suppliers. Myth. Prime OEMs
10-year TSR, 2005−2014 (%)
Number of companies
60
40
20
0 10 20
Commercial 12.4
Diversified 12.3
Defense 11.6
30 40
Exhibit 4 | Commercial and Diversified Players Outperformed Defense-Focused Companies
Sources: Capital IQ; BCG ValueScience Center.
Note: Segment ten-year TSRs are median values for 2005 through 2014. Each dot represents a company in the index, ordered by TSR.
10. 8 Aerospace and Defense Value Creators Report 2015
have lowered the level of their asset holdings, largely through a series of high-
profile spin-offs and other asset-reduction efforts.
However, prime OEMs are still not asset-light companies in absolute terms or in
comparison with tier one and tier two suppliers. The median asset intensity (the
amount of gross fixed assets required to generate a dollar of revenue) for all three
value-chain segments is quite similar, although prime OEMs are slightly more asset
heavy than their tier-one and tier-two counterparts.
Prime OEMs may have shed assets, but the process of developing and integrating
platforms with an increasingly complex supply chain is costly and requires signifi-
cant assets. As these companies continue to demand better cost and quality perfor-
mance from suppliers, they must determine the right level of assets, especially
in cases in which supplier systems or components are brought back in-house for
strategic reasons. (See “Value Chain Reintegration: Undoing Asset-Light Business
Models,” BCG article, December 2014.)
Asset-light aerospace and defense companies generate the highest returns. Myth.
Generally speaking, companies with lower asset intensity tend to generate higher
return on capital employed (ROCE). However, companies that consistently deliver
the highest ROCE are moderate- to high-asset-intensity businesses. A low asset base
is not a necessary condition for generating high returns. At the extreme, operating
models with a very low asset base imply lower barriers to entry and invite competi-
tion, while a larger—and well-managed—asset base can be a competitive moat.
(See Exhibit 5.)
Gross fixed assets as a share of revenues (%)
ROCE versus asset intensity for the sample
25
20
15
10
5
0
20 40 60 80
ROCE, 10-year average (%)
Exhibit 5 | Asset-Light Companies Are Not Earning the Highest Returns
Sources: Capital IQ; BCG ValueScience Center.
Note: ROCE = return on capital employed.
11. The Boston Consulting Group 9
Questions for Senior Aerospace and Defense Leaders
It has been a good decade for the sector in terms of value creation. Yet new industry
dynamics and risks are emerging that will have implications for value creation in the
next ten years and beyond. The challenges include continued uncertainty for defense
budgets and low defense-sector growth, questions about the sustainability of com-
mercial order books, cost pressures on suppliers, new technologies, affordability is-
sues for new commercial and defense platforms, and efforts to simplify the supply
chain.
In the midst of these uncertainties, understanding the industry’s value-creation
performance can help management teams make smarter decisions regarding their
portfolio, end-market exposure, cash deployment, and other parameters for the
next ten years. However, they must address the right set of factors by asking them-
selves some tough questions:
•• How has the company performed relative to others positioned similarly in the
market? What are the opportunities for pulling away from the pack?
•• How should we structure the portfolio relative to end markets and value chain
positions to generate superlative value creation?
•• How much growth do we need? And do we have the portfolio and market
position to drive that growth?
•• What is the optimum balance between returning cash to shareholders and
investing in growth?
•• Do we have the right asset strategy (for example, insourcing versus outsourcing)?
How would a change in our asset structure affect value creation?
A methodological approach to strategy—factoring in the competitive landscape,
financial implications, and the requirements of investors—can help management
teams determine the right answers to these questions. The resulting roadmap can
include new acquisition targets, divestitures, updated RD agendas, cost reduction
imperatives, new supplier arrangements, and new talent and people capabilities.
Many of our clients are already pursuing these options. Regardless of the approach
they choose, company leaders must rely less on intuition and more on objective
facts—informed by an understanding of value creation.
Notes
1. These companies, OEMs and suppliers based mostly in the U.S. and Western Europe, are drawn
from a larger set of 67 global aerospace and defense companies analyzed in BCG’S 2015 Value
Creators Report. The subset consists of companies that pursue a more consistent business model than
the sector’s service providers and whose shares are liquid and largely in private hands, unlike many
Asia-Pacific OEMs and suppliers that are substantially government owned.
2. Total shareholder return is measured as the return from a stock investment, assuming all dividends
are reinvested in the stock. BCG’s TSR model uses a combination of revenue growth and margin
change to assess changes in fundamental value. The model then factors in the change in a company’s
12. 10 Aerospace and Defense Value Creators Report 2015
valuation multiple (the multiple of earnings that investors are willing to pay for a share of the stock) to
determine the impact of investor expectations. Together, these measures determine the change in a
company’s market capitalization and investors’ capital gain or loss. Finally, the model tracks the
distribution of free cash flow to investors and debt holders in the form of dividends, share repurchases,
and repayments of debt to determine the contribution of free-cash-flow payments to a company’s TSR.
13. The Boston Consulting Group 11
About the Authors
Greg Mallory is a senior partner and managing director in the Washington office of The
Boston Consulting Group and the global leader of the aerospace and defense sector. You
may contact him by e-mail at mallory.greg@bcg.com.
Matt Aaronson is a partner and managing director in the firm’s Chicago office and the
leader of the aerospace and defense sector in the U.S. You may contact him by e-mail at
aaronson.matt@bcg.com.
Philippe Plouvier is a partner and managing director in BCG’s Paris office and the leader
of the aerospace and defense sector in Europe. You may contact him by e-mail at
plouvier.philippe@bcg.com.
Kieran Culligan is a principal in the firm’s Los Angeles office and a core member of the
aerospace and defense sector. You may contact him by e-mail at culligan.kieran@bcg.com.
Hady Farag is a principal in BCG’s New York office, a core member of the Corporate Development
practice, and a contributor to BCG’s Value Creators series. You may contact him by e-mail at
farag.hady@bcg.com.
Acknowledgments
The authors would like to acknowledge the contributions of Bailey Hand and Philippe Dehillotte.
They would also like to thank Harris Collingwood and Jeff Garigliano for their help in writing this
report, as well as Katherine Andrews, Gary Callahan, Elyse Friedman, Kim Friedman, Abby Garland,
and Sara Strassenreiter for their contributions to its design, editing, production, and distribution.
For Further Contact
If you would like to discuss this report, please contact one of the authors.