1. Newsroom
  2. Growing, fading, restructuring or maintaining?
Menu
UBP in the press 04.12.2017

Growing, fading, restructuring or maintaining?

Growing, fading, restructuring or maintaining?

Handelszeitung (04.12.2017) - Modelling a corporation’s journey along its CFROI lifecycle enables the discovery of alpha generating opportunities.


The levels and development of a company's Cash Flow Return On Investment (CFROI) are consistent indicators of its ability to create value for investors. Companies tend to follow a similar life cycle of profitability, reflected by their respective levels of CFROIs, which allows for comparison of companies across sectors and countries.

Underestimated return potential

A young company will go through a time of high asset growth and development costs, leading to initially weak levels of CFROI. As strongly growing revenues cover costs better, CFROIs will rise, despite still good asset growth. It can be very rewarding to take part in this high growth stage, but there is inherently a higher level of risk. Interesting CFROI growth names in Switzerland would be Straumann, AMS and VAT. Globally, Technology plays like Google, Facebook and Sunny Optical are attractive.

Subsequent superior CFROIs tend to fade down as value creation attracts competition, often through offering a superior, or more attractively priced, product. Similarly, a product may become obsolete due to new technology or changing consumer behaviour. Mobile telephones evolving into smartphones come to mind here, and, today, many retail formats are challenged by online offerings.

Only around 5-10% of companies are able to sustain their CFROI at high and stable levels for longer than the market discounts. These are interesting investments, as they tend to be long term alpha generators, because CFROIs are revised upwards from expected fading. Examples in Switzerland would include Partners Group, Geberit and Givaudan. Globally, Henkel, L’Oréal and Mastercard come to mind.

When CFROIs deteriorate significantly, a successful management team needs to address the phenomenon before the company goes bankrupt. This typically will involve restructuring, reorientation or new product launches. Restructuring is a high risk, high reward area of investing and it can precede the strong growth of the start of a new CFROI lifecycle. In Switzerland, restructuring names include Gurit, Clariant and Bucher. Globally, the Energy and Materials sectors offer opportunities with EOG, BHP and Rio Tinto.

Zoom in on undervalued companies

A CFROI-based investment approach entails identifying undervalued companies by analysing their position in their CFROI lifecycle. The aim is to combine high-growth CFROI and restructuring companies with corporations which are able to demonstrate high and stable CFROIs. The weighting of the three categories will also depend on the stage of the economic cycle: in periods of uncertainty, a higher proportion of the portfolios will be concentrated on high and stable CFROI generators. Today, where global GDP growth outlook and PMI indicators support economic development, high-growth CFROI businesses should be favoured.

More about Swiss & Global Equities

TAYLOR JOLIDON Eleanor.jpg

Eleanor Taylor Jolidon
Co-Head Swiss & Global Equity

MOELLER Martin.jpg

Martin Moeller
Co-Head Swiss & Global Equity

Small and mid caps

A fertile hunting ground for active managers

Learn more about our expertise on small and mid caps

Watch the video

Le news più lette

Analisi 08.02.2018

Spotlight: Normalisation of long-term yields

The next stage in the post-2008 transition.
Analisi 01.02.2018

Addressing systemic risks in China would extend the Asian rally

From the Desk of a Fund Manager (January): The global equity rally in 2017 stemmed not only from subdued geopolitical risks, but also in part from growing evidence of a pickup in world economic trade and a recovery in commodity prices.

Analisi 30.01.2018

US tax cut: a catalyst for small cap stocks

Both chambers of the US Congress are targeting a tax cut which could reach USD 1.5tn over the next decade. Much has been made of the recent US tax reform.

Altro da leggere

Analisi 08.02.2018

Spotlight: Normalisation of long-term yields

The next stage in the post-2008 transition.
Analisi 01.02.2018

Addressing systemic risks in China would extend the Asian rally

From the Desk of a Fund Manager (January): The global equity rally in 2017 stemmed not only from subdued geopolitical risks, but also in part from growing evidence of a pickup in world economic trade and a recovery in commodity prices.

Analisi 30.01.2018

US tax cut: a catalyst for small cap stocks

Both chambers of the US Congress are targeting a tax cut which could reach USD 1.5tn over the next decade. Much has been made of the recent US tax reform.