Name: Franchise Value: A Modern Approach to Security Analysis
Author: Martin L. Leibowitz (Author)
ISBN: 9780471647881

Franchise Value: A Modern Approach to Security Analysis book cover

Franchise Value: A Modern Approach to Security Analysis

Author(s): Martin L. Leibowitz (Author)

Publisher: John Wiley & Sons
Publication Date: 24 Aug. 2004
Language: English
Print length: 512 pages
ISBN-10: 0471647888
ISBN-13: 9780471647881

Book Description

A modern approach to equity valuation

Understanding the key ingredients that combine to affect price/earnings (P/Es) is of crucial importance to the investment process. In Franchise Value, Martin Leibowitz tackles the imposing task of determining what really has an impact on P/Es. The author shows why he subscribes to the conventional logic that the P/E gauges the market′s assessment of the firm′s future. He then introduce readers to the franchise–value approach to analyzing the prospective cash flows that determine a company′s P/E. The franchise–value approach to valuation enables the analyst or investor to break the firm into two key component parts and to value those components. The franchise value approach is original and insightful, and with this book, readers can begin to implement this approach to perform better equity valuations.

Martin L. Leibowitz, PhD (Stamford, CT), is Vice Chair and Chief Investment Officer at TIAA–CREF, where he is responsible for the overall management of all TIAA–CREF investments. He has authored several books and more than 130 articles, nine of which have received a Financial Analysts Journal Graham and Dodd Award of Excellence.

Editorial Reviews

Review

“. . . Most investors don′t have a clear sense of what a price–earnings mulitiple implies about a company′s future financial performance, or how a company′s price–earnings multiple will likely change over time. The widespread use of relative multiples often compounds the problem. Investors frequently justify their valuation conclusions with apples–to–oranges comparisons of businesses with very different economics. Multiples are ubiquitous but remain, on balance, poorly understood. . . . One of the investment industry′s all–time great thinkers, Marty Leibowitz, covered many of these topics in a series of papers and monographs over the past 20 years (much of this work was in collaboration with Stanley Kogelman). These articles have been complied for Leibowitz′s new book, Franchise Value: A Modern Approach to Security Analysis, which we recommend highly for readers who want to delve into this valuation topic in more detail.”––Michael J. Mauboussin, “Mauboussin on Strategy”, Legg Mason Capital Management (January 14, 2005).

From the Inside Flap

Investors and analysts in today’s fiercely competitive global equities market are finding traditional valuation models to be unrealisticallystatic andwoefullyinadequate for reliably valuing companies and their stock. Looking for improved flexibility and insight into the components of price/earnings growth, they are increasingly turning to the practical and innovative franchise value (FV) approach, introduced by Martin Leibowitz and Stanley Kogelman in the early 1990s. Over the subsequent ten years, this FV approach was further developed through a series of papers, four of which received the prestigious Graham and Dodd Awards.

Franchise Value is the first book to provide investment practitioners with authoritative and comprehensive guidance on the use of this adaptable and insightful approach. Compiling and arranging the writings of FV pioneer Leibowitz in one accessible volume, Franchise Value features detailed information and analysis on the documented improvements FV provides for the analysis of:

Opportunity–Based Growth How the FV approach allows for inherent differences between return on new franchise investments and return on legacy investments
Growth Illusions How the FV approach allows a firm’s earnings, sales, assets, and other variables to follow their own differentiated growth paths, no matter how erratic
Super–Growth and Spread–Driven Growth Techniques for distinguishing between a firm’s superheated early growth and its more persistent later growth
Margin Erosion Within a Competitive Environment How the FV approach allows assumptions to “age” with a firm, helping to prevent overstated P/E ratio forecasts
Leverage and Interest Rate Effects Several ways in which the FV framework resolves the “duration paradox” to provide a reasonable explanation for the more modest real–world duration effects
Generalization to Other Financial Applications How the same decomposition used in the FV approach can be generalized to model a number of financial situations

For the first time, Franchise Value provides a working format for using the franchise value approach to understand and assess the numerous factors involved in determining P/E ratios. As thought–provoking as it is invaluable, it will allow investors and analysts to improve their thinking about valuations and the overall success of their investment decisions.

From the Back Cover

Praise for Franchise Value

“The arrival of Franchise Value could not be more timely for the practice of security analysis. . . . Whether novice student or seasoned professional, the reader is in for a treat. Bon Appetit!”
Robert C. Merton, 1997 Nobel Prize Laureate in Economics

“The franchise value model is a major advance beyond the traditional dividend discount model in the analysis of present and future company value.”
Harry M. Markowitz, 1990 Nobel Prize Laureate in Economics

“A bold investigation into the basis for common stock valuation that will challenge conventional thinking about such basic ideas as earnings and growth.”
Jack Treynor, Treynor Capital Management, Inc.

“Every investor, economist, accountant, and banker will gain from Leibowitz’s powerful insight, keen analysis, and profound understanding of the economic process.”
Peter L. Bernstein, author of Against the Gods

“Franchise Value untangles the knotty issues surrounding equity valuation and growth . . . The important insights in Franchise Value provide enormous practical benefit to all serious students of equity markets.”
David F. Swensen, Chief Investment Officer, Yale University

“This volume . . . is essential reading for anyone who cares about equity valuation.”
Robert Arnott, Editor, Financial Analysts Journal

“This collection . . . ought to be required reading for serious students of equity valuation.”
Professor Jay O. Light, Harvard Business School

“A treasure trove of profoundly important investment insights from one of the most revered minds of our generation. Franchise Value is an outstanding book that is must reading for every investment professional.”
Robert L. Hagin, author of Investment Management: Portfolio Diversification, Risk, and Timing Fact and Fiction

“Security analysts, serious investors, and corporate executives will each find invaluable insights and lessons in this splendid book.”
Alfred Rappaport, Leonard Spacek Professor Emeritus, Northwestern University

“Marty’s long–time work on franchise value has somehow remained an underappreciated part of his vast contribution to investment theory and practice. Hopefully this new collection of papers will remedy the situation.”
Clifford S. Asness, PhD, Managing Principal, AQR Capital Management

About the Author

MARTIN L. LEIBOWITZ is a managing director in the Research Department of Morgan Stanley. For the prior nine years, he served as vice chairman and chief investment officer of TIAA–CREF, overseeing over $300 billion in assets. Leibowitz has authored several books and more than 130 articles, ten of which have received a Financial Analysts Journal Graham and Dodd Award of Excellence. He was the recipient of AIMR’s Nicholas Molodovsky Award in 1995 and the James R. Vertin Award in 1998. In 1995, he received the Distinguished Public Service Award from the Public Securities Association and became the first inductee into the Fixed Income Analysts Society’s Hall of Fame. Leibowitz is a vice chair of both the Carnegie Corporation and the Institute for Advanced Study at Princeton. He holds an AB and an MS from the University of Chicago and a PhD in mathematics from the Courant Institute of New York University.

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