PETM

Recently The Applied Finance Group, LTD provided rankings for CEO Magazine to identify the greatest wealth creating and wealth destroying CEOs in the S&P 500. In the spirit of the upcoming Super Bowl between the Arizona Cardinals and Pittsburgh Steelers, we would like to compare companies in the two respective states to see which state’s CEO is the best wealth creator.

AFG’s scoring methodology is based on its proprietary Economic Margin Framework that sets out to correct accounting distortions and properly understand the market expectations priced into a stock. Most investors understand the concept of Earnings Per Share (EPS) and are happy with the stocks they own that have the ability to grow earnings. AFG’s Economic Margin methodology shows us that earnings are important but are not sufficient to properly measure a company’s operations. AFG looks past earnings to evaluate the profitability and growth (wealth creation) of the entire operation of a business.

Economic Margin (EM) is defined as EM = (Cash Flow - Capital Charge)/ Productive Capital. In simple terms, EM seeks to measure the ability of a company to make money in excess of a risk-adjusted cost of capital. AFG used a multifactor ranking system that combines series of scores to determine a winner in each state. The system evaluates the ability of companies to sustain their historical Economic Margin performance, forecasts expected Economic Margins benchmarked against their peers, and systematically grades management. Based on those criteria, AFG has selected 6 good companies from each state.

However, if you consider investing in any of those companies, please note good companies are not always good investments. There are two components to look at for any investment: the ability of a company to create shareholder value and the attractiveness of its share price in the market. There are times when a well ran business that creates wealth is not a great investment. Investors must understand the embedded expectations they are paying for that performance and determine if those expectations are realistic for the company going forward.

 Arizona Super Bowl Companies with Sales Growth Expectations Implied by Current Trading Price

  Pennsylvania Super Bowl Companies with Sales Growth Expectations Implied by Current Trading Price

*Assuming a constant 5 year median EBITDA margin for each company.

*Assuming a constant 2007 EBITDA margin for FSLR.

Generally speaking, companies with pessimistic VE sales growth relative to their 5 year median sales growth are considered undervalued from AFG’s perspective, such as PETM, RRR,FCX, APOL from Arizona, and ABC, UGI, CEPH, from Pennsylvania.

And the winner is....

Cephalon Inc (CEPH) -CEPH has been a very profitable company in the last three years with very stable economic margins, much like the Pittsburgh Steelers who won the Super Bowl just three years ago. Based on AFG’s forecast, it appears that CEPH is in position to maintain its economic profitability while continuing to grow its assets.

First Solar Inc (FSLR) – FSLR is a solar module designer and manufacturer located in sunny Arizona. Helped by the growing public attention and support to alternative energy, the company has done a nice job of turning their business around from earning below their cost of capital to a high level of profitability.