Franchise Value: A Modern Approach to Security Analysis

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

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.

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.