摩根士丹利-竞争优势持续期：被忽视的价值驱动因素 Competitive Advantage Period The Neglected Value Driver

.

CounterpointGlobalInsights

CompetitiveAdvantagePeriod

TheNeglectedValueDriver

CONSILIENTOBSERVER|April14,2026

Introduction

Long-termfundamentalinvestingliesattheintersectionoffinanceandcompetitivestrategyanalysis.Acentralprincipleinfinanceisthatthevalueofanassetequalsfuturecashflowsdiscountedtothepresentatanappropriateopportunitycostofcapital.Acorollaryisthatcompaniesshouldseektomakeinvestmentsthathaveapresentvaluegreaterthantheircost.

Acoreideainmicroeconomicsisthatthepriceofagoodorserviceeventuallyequalsitsmarginalcost.Inotherwords,businessesultimatelyearntheircostofcapitalastheresultofcompetition,marketmaturation,andsenescence.

Thegoalofacompanyistoidentifyandexecuteastrategythatgivesitacompetitiveadvantagethatissustainable.Acompany’santicipatedvaluecreationismeasuredbyhowmuchitsreturnoninvestedcapital(ROIC)exceedsitscostofcapitalaswellashowlongitcanmaintainapositivespread,areflectionofitssustainablecompetitiveadvantage(seeexhibit1).1ROICisdefinedasnetoperatingprofitaftertaxes(NOPAT)dividedbyinvestedcapital,thenetassetsacompanyneedstogenerateNOPAT.

Thisreportisaboutthe“howlong”part.Themeasureiscalled“competitiveadvantageperiod”(CAP),definedastheamountoftimeacompanycanearnreturnsabovethecostofcapitalonnewinvestments.2TheconceptofCAPhasbeenaroundfordecades,andhasgonebythenames“valuegrowthduration,”“fade,”and,moreprosaically,“T.”3

Executivescommonlystrivetoachieveacompetitiveadvantage,andinvestorswidelyacknowledgeitsimportance.ButthetoolsusedtoquantifyCAParewanting.

Specifically,marketparticipantsgenerallyassessvalueusingmultiplesofearningsorcashflowthatobfuscatethecontributionsofgrowth,returnoninvestedcapital,opportunitycost,andCAP.Asmallernumberofpractitionersusediscountedcashflowmodels,buttheylimitthemodel’sutilitybymakingungroundedassumptionsfortheterminalvaluethatoftenmakesupthevastmajorityoftheworth.

AUTHORS

MichaelJ.Mauboussin

michael.mauboussin@

DanCallahan,CFA

dan.callahan1@

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TableofContents

Introduction 1

Valuation 4

ABriefHistory 4

Miller&Modigliani 6

InPractice 8

CompetitiveStrategyAnalysis 12

ABriefHistory 12

EmpiricalObservations 15

CorporateLongevity 15

DistributionofROICs 18

RegressionTowardtheMean 18

SomeCompaniesHaveLongCAPs 20

TheBasisforSustainableValueCreation 23

LifeCycleandCompetitiveAdvantagePeriod 23

ValuationApproachbyStage 27

AssessingtheMarket’sExpectationsforFreeCashFlow 29

TerminalValue:CombiningFinanceandCompetitiveStrategy 32

TerminalGrowthModels(GordonGrowth,ValueDriver,Perpetuity,andFade) 32

TerminalModelEquivalenceAssumingEquilibrium 33

TerminalModelDifferencesWiththeAssumptionofSustainedExcessReturns 33

BringingItAllTogether 35

SimplifiedCaseStudy:Microsoft 37

Summary 38

AppendixA:PersistenceFactors,FadeRates,andMeanROICsbyIndustry 40

AppendixB:ROICTrendbySector 42

Endnotes 46

References 55

©2026MorganStanley.Allrightsreserved.5367986Exp.4/30/20283

Exhibit1:CompetitiveAdvantagePeriodReflectstheSustainabilityofReturns

Returnslessthecostofcapital

Magnitudeofexcessreturns

•considerreinvestmentrate

Howlongacompanycan

generateexcessreturns

(CompetitiveAdvantagePeriod)

EconomicReturn

Source:CounterpointGlobal.

Westartwithabriefhistoryofvaluation,discusswhatweconsidertobetheseminalpaperonvaluation,andreviewthelatestworkonhowvaluationisdoneinpractice.

Wethenturntotheevolutionofcompetitivestrategyanalysis,followedbyalookatwhatactuallyhappenstopubliccompanies,andassesstherelevanceofCAPoverthelifecycle.Next,weconsiderhowtomodelfuturegrowthaswellasmethodstoestimateterminalvalue,includingafademodelthatreflectsregressiontowardthemean.

Wenextlayouttheanalyticalstepstomeasuremarket-impliedCAP.Theseinclude:

•Identifythestageacompanyisinwithinthelifecycle

oRoughlytwooutofthreeU.S.publiccompaniesareinthegrowthormaturitystages

•Useconsensusforecastsforvaluedriversandasensibleestimateofthecostofcapital

oBuildinarealitycheckbymeasuringincrementalROIC

oCalculatethecostofcapitalbasedonmarketpricesforrisk

•DetermineasuitablemethodtoestimatetheterminalvalueusingappropriateestimatesofROIC,growth,andfaderate

oIncorporateafadebasedonempiricaldataforthesectororindustry

•Expandtheexplicitforecastperiodasnecessarytosolvefortoday’sstockpricetodeterminethemarket-impliedCAP

oMostcompanieswillbeintherangeof5to20years

•Assessplausibilitybycheckingassumptions,evaluatingsimilarcompanies,andreferringtoanalysisofthecompany’scompetitiveposition

oThemarkettendstovaluesimilarbusinessesinsimilarways

oConsiderexpectationsforvaluecreationinthecontextofstrategiccircumstances

Exhibit2summarizestheissuestoconsiderwhenbringingtogetherfinanceandcompetitivestrategyinavaluationmodel.Theproductofthisanalysisisagroundedsenseofwhatfinancialresultsthemarkethaspricedintoastock.Thenextstepistodofinancialandstrategicanalysistoassesswhetherthoseexpectationsaretoolow(buythestock),toohigh(sellthestock),oraboutright(moveontothenextpotentialopportunity).

Wefinishwithasimplifiedcasestudytomaketheideasmoreconcrete.

©2026MorganStanley.Allrightsreserved.5367986Exp.4/30/20284

Exhibit2:ConnectingFinanceandStrategyinValuation

CombinationofExplicitForecastPeriodandTerminalValue

Methodtointegratefinanceandstrategy

Canaccommodateoutlookforsustainablevaluecreation

DiscountRate

Enterprisevalue(WACC)orequity(costofequity)

Methodtoestimatecostofequity(CAPMdominates)

MagnitudeofROIC

RelationshipbetweeninvestmentandprofitsdeterminesincrementalROIC

FCFGrowthProjections

Baserates

Persistenceofgrowthrates

Industryandmacroeconomic

WhichFCF?

FCFtoenterprisevalue

FCFtoequityvalue

4

2

6

3

1

MethodtoEstimateTerminalValue

GordonGrowthModelmostcommon(V=FCF/[k-g])

g≈inflation

BettertotailorCVcalculationbycompany

TerminalValue

5

FCF

++

...(1+k)N

FCF(1+k)2

FCF(1+k)1

FCF(1+k)4

FCF(1+k)3

+

+

+

Source:CounterpointGlobal.

Valuation

Abriefhistory.Boileddowntothebasics,valuationisabouttwoprinciples:Adollartodayisworthmorethanadollartomorrow,andadollarthatislessriskyisworthmorethanadollarthatismorerisky.Therateofreturnreflectstheriskinessofthecashflowstream.Valuation,therefore,seekstoquantifythemagnitudeofthecashflowsanownermayreceive,whentheymaybereceived,andwhatreturnisjustifiedgiventheriskofthosecashflows.

Practitionersapplytheseprinciplestocorporateinvestments,bonds,andequities.

Theconceptsofloans,interestrates,andcompoundinterestgobackatleastasfarastheBabyloniansinMesopotamiain2000-1700B.C.4Forexample,aclaytabletfromthatera,nowheldinthecollectionoftheLouvreMuseuminParis,offersaproblemincompoundinterest.5

Manyreligioustraditionshistoricallycondemnedusuryand,attimes,prohibitedcharginginterestonloans.Inpractice,merchantsandjuristsdevelopedworkaroundsandjustifications,includingtheconceptoflucrumcessans(“foregoneprofit”).Thenotionisthatcompensationisjustifiedbecausethelendergaveupthechancetoinvestelsewhere.Thisacknowledgesopportunitycost.6

Fibonaccidiscussedcompoundinterestinhisbook,LiberAbaci,publishedin1202,andcompoundinteresttableswereprintedinthe16thcentury.7ADutchwaterboard,HoogheemraadschapLekdijkBovendams,issuedaperpetualbond(2.5percentannualinterest)in1624thatisstillmakingpayments400yearslater.Theinterestisabout€15peryear.8

Railroadcompanieswereamongthefirsttoexplicitlyapplythecriterionthatthebenefitfromthepresentvalueoffuturecashflowsshouldexceedthecostoftheinvestment.9Otherindustrieswerequicktofollow,includingtelecommunications(AT&T),energy(AtlanticRefining),industrials(DuPont),andautomotivemanufacturing(GeneralMotors).10

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Notably,theconceptof“residualvalue,”thevalueofanassetattheendofitsusefullife,becameimportantinthisanalysis.11Buttheideafocusednarrowlyonspecificinvestments,ratherthanlookingatafirmoverall.

Equityinvestorslaggedcompaniesinadoptingvaluationtechniquesbasedoncashflow.Intheeighteenthandnineteenthcenturies,equityvaluationgenerallyfocusedondividendyieldsandassetvalue.12Thismakessense:equityinvestorswantedahigheryieldthanbondholdersbecauseequityisriskierthandebt.Oneresearchercapturedtheideathatstocksaremoreuncertainversionsofbondswhenhewrote,“commonstockisabondwhichpromisesfuturepaymentsindefiniteinnumberandamount.”13

IrvingFisher,arenownedprofessorofeconomicsatYaleUniversity,arguedthatthevalueofanyfinancialassetisthe“rateofinteresttoberealized”andthe“seriesofsums”theinvestmentisgoingtoreturntotheinvestor.14Whilestockswereconsideredmorespeculativethanbonds,therewasagrowingviewtheycouldprovidesolidreturnsinthelongterm.15

ProfessionalisminequityanalysistookalargestepforwardwithSecurityAnalysis,abookwrittenbyBenjaminGrahamandDavidDoddthatwaspublishedin1934.16GrahamandDoddstressedthedistinctionbetweeninvestingandspeculating.Investingisbuyingapartialstakeinabusinessatapricebelowintrinsicvalue.Speculatingisbuyingastockinthehopethatitgoesup.

GrahamandDoddreliedonconservativemetrics,includingliquidationvalueandmultiplesofnormalizedearnings.Theylaterintroducedequationstosolveforanappropriateprice-earningsratio,includingoneinachaptercalled“NewerMethodsforValuingGrowthStocks”inthefourtheditionofSecurityAnalysis.17Thatedition,releasedin1962(whichincludedthefinanceresearcherSidneyCottleasanadditionalauthor),wasthelastoneGrahamworkedon.Still,Grahamwaswaryofplacingtoomuchvalueonthefuture.

Dividendyieldremainedapopularmeasureofequityvaluationformostofthe20thcentury.Infact,whenthedividendyieldonstocksdippedbelowthatofinvestmentgradebondsin1958,marketveteranssoundedthealarmthatstockswereovervalued.18AnarticleinFortunemagazineinearly1959capturedthetone:“IthasbeenpracticallyanarticleoffaithintheU.S.thatgoodstocksmustyieldmoreincomethangoodbonds,andthatwhentheydonot,theirpriceswillpromptlyfall.”19Withrareexception,stockshaveyieldedlessthanbondssincethen.

JohnBurrWilliams,aneconomist,publishedTheTheoryofInvestmentValuein1938.20Williamsformallylaidoutthedividenddiscountmodel,whichcalculatesthevalueofastockasthepresentvalueoffuturedividends.Williamsmovedvaluationfromapracticebasedmostlyonheuristicstoonegroundedintheory.

Asaninterestingaside,BenGrahamreviewedTheTheoryofInvestmentValueandwasgenerallyfavorable(“hisformulasareunimpeachable”).ButhehadmajorquibbleswiththeassumptionsWilliamsmakesaboutratesofgrowth,interestrates,and“the‘terminalvalue’whengrowthceases.”21Specifically,henotedthattheterminalvalue,calculatedbythe“quiteconventionalmethodofmultiplyingexpectednormalearningsby20,”was95percentofthetotalvalueinWilliams’scasestudyofPhoenixInsurance.

JoelDean,aprofessoratColumbiaBusinessSchoolandaconsultant,introducedtheterm“discountedcashflow”(DCF)in1953.22Hisfocuswasprimarilyonthecapitalbudgetingdecisionsofcompanies,butthelogicextendedreadilytoinvestorsevaluatingcompaniesoverall.

Enterprisevaluetoearningsbeforeinteresttaxesdepreciationandamortization(EV/EBITDA)isarelativelynewmeasureinvaluation.JohnMalone,asuccessfulbusinessman,isoftencreditedwithpopularizingEBITDAwhenhewasthechiefexecutiveofficerofTele-CommunicationsInc.inthe1970s.EBITDAalsobecameawidespread

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measureinthebuyoutindustryinthe1980s.23OfEB|TDA,Malonesaid,“Somepeoplesay|allbutinventedtheterm.|can’tsweartoit,thoughitistruethat|helpedmakeitawholenewformofcurrencyonWallStreet.”24

Aswewillsee,investorscontinuetorelyprimarilyonmultiples,mostprominentlyprice-earnings(P/E).Earningsyield(E/P)istheinverseofP/Eandhasbeenusedhistoricallytocomparestockstobonds.Thisincludesthe“FedModel,”whichcomparestheearningsyieldontheS&P500totheyieldonthe10-yearU.S.Treasurynote.25TheS&P500isanindexofapproximately500U.S.stockswiththelargestmarketcapitalizations.

Multipleshaveutilitybutareultimatelyshorthandsfortheactualprocessofdiscountingcashflows.TounderstandCAP,wehavetogoanalyticallydeeperthanmultiplescantakeus.

CreditandrealestateinvestorsexplicitlyuseDCFmodels,butmanyequityinvestorsdonot.Thelikelyreasonisthatthemagnitudeandtimingofcashflowsarebetterspecifiedintheseotherassetclasses(contractually,inthecaseofcredit).Forequities,weknowneitherthecashflowsnorthediscountrate.

AsGrahamhighlightedinhisreviewofTheTheoryofInvestmentValue,theterminalvalue(alsoknownascontinuing,horizon,orresidualvalue),orvalueassignedbeyondtheexplicitforecastperiodinamulti-stagediscountedcashflowmodel,isamajorchallengetousingaDCFmodeleffectively.HowthisisdoneisfundamentaltounderstandingCAP.

Theoriginalapplicationofresidualvaluewasonspecificphysicalinvestments.Forexample,assumeacompanybuysamachinewithanassumedlifeoffiveyears.Theresidualvalueseekstoassesswhatthemachineisworthafterfiveyears.Theextensionofresidualvaluetoreflecttheterminalvalueofafirm,whichisabundleofprojects,isvastlymoredifficult.

Wewilldiscussterminalvalueinmoredetailinamoment.MyronGordon,aneconomist,developedatechnique,commonlycalledtheGordonGrowthModel,thatremainswidelyusedtoday.26Inasimpleform,themodelsays:

Distributablecash

Value=Costofcapital_Long-termgrowthrate

Forinstance,acompanywithdistributablecashof$2,acostofcapitalof7percent,andagrowthrateof3percentwouldbeworth$50($50=$2÷[0.07–0.03]).

ThefoundationoftheGordonGrowthModelissound,butitiseasytoabuse.Inparticular,growthrateswellabovetherateofinflationcanleadtovaluesthatfailtoreflectlikelyoutcomes.

Miller&Modigliani.MarkRubinstein,afinancialeconomist,referredtopre-1950as“TheAncientPeriod”inhisbook,AHistoryofTheTheoryofInvestments.27Wewouldarguethatourunderstandingofmodernvaluationstartedwiththepaper,“DividendPolicy,Growth,andtheValuationofShares”writtenbyMertonMillerandFrancoModigliani(M&M),bothNobelPrizewinningeconomists,andpublishedin1961.28

Approachestovaluationuptothatpointreliedonvariousmeasuresincludingearnings,cashflow,anddividends.M&Msetouttoanswerthequestion:“Whatdoesthemarketíreally’capitalize?”Theyfoundthatwhentreatedproperly,theapproachesallprovidethesameanswer.Oneimplication,whichwasnotobviousatthattime,isthatafirm’sdividendpolicyisirrelevant.29Manyinvestorstodayremainconfusedabouttheroleofdividends.30

OnemethodM&Madvocateiswhattheycallthe“currentearningsplusfutureinvestmentopportunitiesapproach.”Wecansimplifytheirmathintothefollowingformula:

NOPAT|nvestmentx(RO|C__Costofcapital)xCAP

Value=+

CostofcapitalCostofcapitalx(1+Costofcapital)

©2026MorganStanley.Allrightsreserved.5367986Exp.4/30/20287

NOPATstandsfor“netoperatingprofitaftertaxes”andisameasureofunleveredcashearnings.Investmentincludescapitalexpenditures(lessdepreciation),workingcapitalchanges,andacquisitions.ROICisameasureofreturnoninvestment.Thecostofcapitalreflectsopportunitycost.CAP,whichM&Mdesignateas“T,”isthecompetitiveadvantageperiod.

Thisformuladividesthevalueofafirmintotwoparts.Thefirsttermontherightside,NOPATdividedbythecostofcapital,isthesteady-statevalueofthefirmassumingthatthelevelofNOPATremainsstable.Thisisalsocalledthe“pre-strategyvalue”orthevalueof“assetsinplace.”

Thesecondtermontheright,commonlycalled“presentvalueofgrowthopportunities”(PVGO),reflectsfuturevaluecreation.ThevalueofPVGOisafunctionofhowmuchacompanycaninvest(investment),atwhatspreadversusthecostofcapital(ROIC–costofcapital),andforhowlong(CAP).31

M&Mwritethattheformula“hasanumberofrevealingfeaturesanddeservestobemorewidelyusedindiscussionsofvaluation.”Weagree.Herearesomewaysitcaninformanalysis:

•Theformulaallowsyoutodisaggregateaprice-earningsmultipleintoacommoditycomponent(thefirsttermontheright)andafranchisecomponent(thesecondterm).Assumingabusinessthatisfinancedentirelywithequity,thecommodityP/Emultipleis1÷costofequity.Ifthecostofequityis8percent,thecommodityP/Eis12.5(12.5=1÷0.08).Whilemoreinvolved,wecandoasimilarcalculationforthecommodityEV/EBITDAmultiple.32Anypremiumtothatmultiplereflectsfuturevaluecreation.33

•Thesignificanceofthereturnonincrementalinvestedcapitalbecomesimmediatelyobvious.IftheROIConnewinvestmentisequaltothecostofcapital,thevalueoftheequation’ssecondtermiszero.EvenanROICthatisinitiallyhighbutdecliningcanrevealatrajectorythatendswithearningthecostofcapitalorless.

•Theformulashowsthattheeffectofgrowthisqualifiedbytheincrementalreturn.RapidgrowthaddsalotofvalueforfirmswithalargespreadbetweentheROICandthecostofcapital.Growthsubtractsvalueforcompanieswithnegativespreads.

•M&Mnotethat,“theessenceof‘growth,’inshort,isnotexpansion,buttheexistenceofopportunitiestoinvestsignificantquantitiesoffundsathigherthan‘normal’rates.”That“normal”rateisthecostofcapital.

•Theequationrevealswhyrelativevaluationtechniquescanbemisleading.Companiesinthesameindustrywithdifferenteconomiccharacteristicsmaynotbecomparable.WefindthereismoredispersioninROICwithinindustriesthanthereisacrossindustries.34

•Theequationprovidesaquicksenseoftheexpectationsforfuturevaluecreationembeddedintheshareprice.Forinstance,thesteady-statevaluefortheS&P500hasbeentwo-thirdsofthepriceandthePVGOtheotherone-third,onaverage,from1961to2025.35

•ThereisresearchthatshowstheratioofPVGOtopricehelpspredictstockreturnsoverthenexttenyears.Lowratios,whichimplymodestexpectationsaboutfuturevaluecreation,precedeabove-average10-yearreturns,onaverage.Highratios,whichanticipatealotofgrowththatcreatesvalue,suggestbelow-averagereturns.36Asofthebeginningof2026,thepercentagesforsteadystateandanticipatedvaluecreationwereclosetoequal.

Inhisbook,CreatingShareholderValue,AlfredRappaport,aprofessoremeritusattheKelloggSchoolofManagementatNorthwesternUniversity,wasaheadofhistimeinhighlightingtheimportanceofCAP(hecalled

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it“valuegrowthduration”).HeurgedexecutivesandinvestorstoconsidercompetitivestrategyanalysisinassessingCAPanddemonstratedthepowerofreadingCAPfromstockprices.37

RappaportshowedthatthelengthoftheCAPisnotjustaninterestingtheoreticalconcept,butitcanbeestimatedtounderstandtheexpectationsastockpricereflects.Thisapproach,basedonmarketsignals,shiftsthefocusfromwhataparticularinvestorthinkstowhatthemarket,acollectionofinvestors,thinks.

CompetitivestrategyanalysisisastructuredapproachtounderstandhowandwhyacompanycanproduceanROICabovethecostofcapitalforanextendedperiod.Investorsoftenrefertothemagnitudeofcompetitiveadvantageasa“moat.”38

WarrenBuffett,chairmanofBerkshireHathawayandoneofthegreatestinvestorsofalltime,popularizedthemetaphor.Herepeatedlydiscussedhisdesiretobuybusinessesthatarecastleswitheconomicmoatsaroundthemthatarewide,deep,andfilledwithalligatorssoastokeepthecompetitionatbay.

Buffetthasalsounderscoredthateconomicmoatsarerarelystable.Competitiveadvantageisgenerallystrengtheningorweakening,whichmeansthemoatisgettingwiderornarrower.Whenabusinessdecisionintheshorttermcomesintoconflictwiththecompetitivepositioninthelongterm,hearguesthat“wideningthemoatmusttakeprecedence.”39

In2002,theSecuritiesandExchangeCommissionapprovedarulethatrequiredtherecommendationsandpricetargetsofanalyststohavea“reasonablebasis”andcomewith“aclearexplanationofanyvaluationmethod.”40Asaresult,therateofdisclosureofthevaluationapproachanalystsusedintheirreportswentfromabout50percenttoessentially100percent.41Wenowexaminehowtheysatisfiedthatrule.

Inpractice.FrancescaBastianello,PaulDécaire,andMariusGuenzel,professorsoffinance,createdabreakdownofvaluationapproachesformorethanonemillionreportsbysell-sideanalystsfromaroundtheworldfrom2000to2025(exhibit3).42Sell-sideanalystsarefinancialprofessionalswhoissuestockrecommendationsandoftenworkforinvestmentbanksorbrokeragefirms.Buy-sideanalystsworkforinvestmentmanagementfirmssuchasmutualfundsorhedgefunds.Theuseofmultiplesingeneral,andtheP/Emultipleinparticular,hasgenerallydominatedthediscountedcashflowmodel.

Thatsaid,thevaluationapproachesthatanalystsemployvaryagreatdealbygeography.Forinstance,multiplesaremuchmorepopularthanDCFmodelsinNorthAmericaandAsia,whileDCFmodelsaremoreprevalentinEurope,SouthAmerica,andAustralia.Further,youcanseeaspikeintheuseofDCFmodelsin2009becausealotofcompanieswerelosingmoneyasaresultoftheGreatRecession,makingmultiplesofnear-termearningsnonviable.

©2026MorganStanley.Allrightsreserved.5367986Exp.4/30/20289

Exhibit3:BreakdownoftheValuationMethodsofAnalysts,2000-2025

FrequencyofUsage(Percent)

Multiples(Any)

DiscountedCashFlow

Price-Earnings

70

60

50

40

30

20

10

0

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

Source:FrancescaBastianello,PaulH.Décaire,andMariusGuenzel,“ValuationModels,”WorkingPaper,November2025.

TheuseofDCFmodelsishigherin2025thanitwasattheturnofthiscentury,butwelloffofitspeak.TheresearchersusedthesizeoferrorsinpriorforecastsasaproxyforskillandfoundthatskilledanalystsweremoreaccuratewhentheyusedaDCFmodelthanwhentheyusedmultiples,especiallyforfirmsthatarehardtovalue.43Bycontrast,theless-skilledanalystswereworseoffusingaDCFmodel.

Thisunderscoresthatitisnotthemodelthatmatterspersebutrathertheexpertiseandjudgmentwithwhichanalystsutilizeit.CarefulstudiesofhowanalystsapplyDCFmodelsshowaconsistentsetoferrorsandmisjudgments,includingincorrectderivationsoffreecashflow,improperterminalvalueassumptions,andsloppycalculationsofthecostofcapital.44

MultiplesaregenerallynothelpfulinthinkingcarefullyaboutCAPbecausetheyaretheproductofalotofvariables,includingROIC,growth,risk,andcompetitiveadvantage,thatarenearlyimpossibletountangle.Wecansaythatcompaniestradingatacommoditymultiplereflectnovaluecreation(oradeterioratingcorebusiness)andthathighvaluationsgenerallyalignwithhighexpectations.Butthecoreassumptionsareimplicit.45

TounderstandCAPweneedtonarrowourfocustothetwomaincomponentsofcashflowforecastsinamulti-stageDCFmodel:theexplicitforecastperiodandtheterminalvalue.Manyinvestorsbelievetheexplicitforecastperiodshouldberelativelyshortbecauseforecaststhataretoofarinthefutureareinherentlydifficulttomake.

Butitisroutineformostofafirm’svaluetobeatt