S&P 500 Sales Growth Expectations by Sector (ex. Financials) - (INDEXSP:.INX)

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The Applied Finance Group's Value Expectations interface sets out to understand the imbedded sales growth a company needs to earn over the next 5 years to justify the company's current stock price. Measuring the spread between a company’s VE sales growth expectation (Implied Sales Growth) and what it has historically delivered (5 year historical median) provides a basis to determine which stocks have relatively low expectations imbedded into their current prices and thus are more likely to outperform.

After solving for the implied sales growth (VE Sales Growth) for every company in the S&P500 (INDEXSP:.INX) (ex. Financials) we find that the average implied sales growth for the overall index is 7.64%. Relative to the 12.31% the same group of companies was able to deliver historically (5 Year Median), the implied sales growth (7.64%) seems fairly low relative to historical expectations. The chart below displays how the imbedded sales growth expectations (red bars) compare relative to the historical average (blue bars) by sector to determine which sectors might be the most undervalued.

One thing to note is, when we solve for sales growth, we use AFG’s Economic Margin Framework to correct for accounting distortions by taking into account Asset Life, Asset Mix, Asset Age, Capital Structure and Growth, Cost of Capital and Inflation.

Click here to register for Value Expectations to learn more about AFG’s understanding of sales growth expectations “priced-in” to share prices.

*AFG’s Value Expectations allows us to understand the Sales Growth, EBITDA Margin, and Asset Turnover a company has to deliver in the future to justify its current trading price. In theory and in normal circumstances, if the imbedded future performance is very conservative relative to the company’s historical performance, the stock is regarded as undervalued. The table displays the implied future Sales Growth of the list of companies assuming their EBITDA Margins and Asset Turnovers stay at the 5 year median levels.

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AFG's Valuation Metric – Measures the percent to target (deviation between a stock’s current trading price and its AFG current default target price). To derive the intrinsic value of a firm, AFG uses its proprietary Valuation Model (modified discounted cash flow model).

Economic Margin - A corporate performance measurement that addresses the gaps in GAAP, eliminating distortions caused by accounting policies to measure what a company is truly earning above or below their cost of capital.

Management Quality – Assesses management’s ability to make wealth creating decisions.