The Art of Valuation

Longevity – The Secret to Sustaining Company Valuation!

longevity covalue

While some companies flourish through their edge of time, others fizzle out after a quick burst of creative products. What is it that makes a company endure success for long? How does one define the longevity of a business?

Longevity is the ability of a company to experience a long Value Growth Duration, i.e. a period in which a company Earns more than the Cost of Capital, Experiences Value Augmentation/Economic Value Add (EVA) and Creates Shareholder Value. This longevity can be built based on the company’s distinct competitive advantages.

A business’s longevity relies on what they produce today and for how long it will still be relevant in the future. Companies like Apple Inc., Microsoft, Google, etc. are notable examples as these businesses have a competitive edge over the market to protect their sustainability.

Business Longevity is a relative concept measured in innovation cycles, not years. Depending on the industry type, one can decide the value creation period, based on the product lifecycle of the business. Industries such as Professional Services, Banking, Insurance, FMCG, etc. naturally incline to a long time-frame of growth value period as compared to other industries such as technology, where the pace of change tends to be much faster.  A tech firm that creates value for 10 years, has in a business sense brought as much value as a consumer-product company could have brought in 30 years.

Longevity is a critical factor in defining the forecast period of a company. It depends on factors like:

Market size and Opportunity

The emerging needs of the consumers, the potential of the product and the opportunity to grow in the market lay a foundation for strong longevity. Amazon became one of the largest internet company by revenue in the world by venturing into online retailing with a value pricing strategy. Initially, Amazon’s founder Jeff Bezos only targeted USD 10 billion book market in the US but the vision and opportunity for market penetration by an expansion of product portfolio and new markets gives it longevity. Further, Amazon’s unique Supply Chain Configuration has an unmatched competitive edge and ability to grasp this opportunity to the maximum. That is how one can derive Amazon’s longevity.

Innovation

Disruptive innovations such as radical shifts in technology, customers, regulatory changes, etc., create new markets, are key differentiators for a company, and can considerably increase its longevity.

Apple Inc., launched the first touch-screen phone with its unique Operating System and in-built personalized features, disrupting the entire mobile market and emerging as a leader in the space. Differentiating itself through strong brand power and customer loyalty, Apple today swallows about 80% plus profits of the smartphone industry.

Likewise, Gillette was the first company to introduce razors in 1919. Ever since the introduction, the company has had a strong market consumption and always had close to 70% market share. Creating a legacy of quality products, formidable brand power and distribution channel that retains 54% of the global market share, the company has created its longevity.

Economic Moat

Economic Moat is the likeliness of the company to keep its competitors at bay for an extended period.

The strong distribution network, product innovation, patents, cost advantage, government licenses, etc, are some of the MOATs created by the companies for longevity.

ITC, with a brand heritage of about 100 years, has created value in the cigarette market enjoying a formidable market leadership with 85% market share in the economy. The company’s strong distribution network i.e. 10 million points of sale and distinctive quality through 12 iconic brands creates irreplaceable economic moats making ITC Cigarettes the strongest contender of the smoker’s world!

Similarly, the Arabian oil company – Aramco became the world’s largest energy company with 330 billion barrels of oil reserves, coming from its rich source of natural reserves. Aramco’s cost of oil production at about USD 9, is the lowest in the world. Aramco’s high resource ownership gives it a competitive edge.

Brand Heritage & Market Share

Brand heritage is created when a company’s brand of specific products is placed well enough in the market despite sustained competition and adverse economic environments for decades.

Coca Cola was the first to introduce soft drinks in the market in the year 1886. The brand’s unique recipe and customer demand have carved the market while the company developed a ubiquitous distribution network and branded itself as the largest soda maker. With a heritage of 133 years, Coca Cola today sells 1.9 billion drinks each day in more than 200 countries enjoying a higher market share than its biggest competitor – Pepsi.

The 125-year-old company, Nestle, is the largest consumer brand today with more than 2000 brands ruling the consumption of the masses across 189 countries.

Ferrari, the Italian luxury sports car manufacturer gets its exclusivity factor as the brand heritage that bestows it with pricing power. Ferrari reports of Operating Profit Margin of over 18%. Brand Heritage allows companies to impose premium pricing for their products, acquire market share seamlessly, and increase their longevity.

Entry barriers in the industry

Industries like Tobacco, Alcohol beverages, Pharmaceutical, Telecommunication, etc. impose barriers to new entrants on the grounds of licenses, extensive capital, research, patents, quality, etc. increasing the longevity of the existing companies. The barrier in entry helps keep new competitors away and ensure a level playing field amongst the existing companies.

Pfizer, the internationally acclaimed one of the best companies in the pharma sector holds the highest number of patents in the industry with innovative and revolutionary products. Pfizer enjoys an almost monopolistic role and strong longevity in the industry owing to its strong innovation power and entry barriers in the industry.

Supply chain

Supply Chain Integration is an edge that can change the value of the company significantly.

Walmart Inc., the American multinational retail corporation operating chains of hypermarkets, discount department stores, grocery stores, etc is known for its exceptional supply chain integration with automated reordering system, retail link- centralized database and RFDI technology for inventory management. Walmart‘s low networking capital amongst its peers aids the company to pass on cost benefits to competitors and ensure efficiency, thereby increasing the longevity of the business.

The Market functions, majorly on two types of companies:

– Companies that create value and endure over decades or centuries,

– Companies that create value for a limited time period and then either stabilize or gradually fizzle out

The above factors cover the core of longevity distinguishing the first type of company from the other. Longevity is defined as the corporate lifecycle of a business that currently is on an average of 67 years, excluding the impact of disruptive technological innovations and external factors such as natural disasters, economic slowdown, etc.

The concept of longevity assists in the estimation of the Forecast Period for a company and is an important Value Driver in Company Valuation.

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About the author

Rattan Joneja

Rattan Joneja

CEO & Founder at CoValue Technologies.
Empowering Investors and Business to Create Wealth.

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