The Unique HOLT™ Methodology

Financial statements as presented often distort the true economics of a business. The unique HOLT™ Methodology called CFROI® converts income statement and balance sheet information into cash flow return on investment, which more closely approximates a firm's underlying economics. HOLT can then more effectively estimate a firm's value from levels of and changes in cash flow and life-cycle patterns, operating assets, reinvestment rates, and discount rates

Simply stated, HOLT takes accounting information, converts it to cash and then values that cash.

The CFROI® metric result is calculated in two steps: First, we measure the inflation-adjusted gross cash flows available to all capital owners in the company and compare that to the inflation-adjusted gross investment made by the capital owners. We then translate this ratio of gross cash flow to gross investment into an Internal Rate of Return (IRR) by recognizing the finite economic life of depreciating assets and the residual value of non-depreciating assets. The CFROI® result approximates the economic return produced by the firm's projects.

HOLT's proprietary CFROI® performance measure corrects many common distortions found in traditional accounting measures of performance, such as: inflation, depreciation method, asset mix, asset life, deferred taxes, pension accounting, research and development, off-balance sheet items, inventory accounting, asset holding gains or losses, acquisition accounting, investments, and revaluations. Thus, true economic wealth creation or destruction can easily be assessed to determine a company's warranted value.

A Disciplined Valuation Approach

The HOLT™ Valuation product utilizes a robust discounted cash flow methodology to value companies. In short, the HOLT CFROI® Valuation Methodology represents a type of discounted cash flow model. Aside from our unique CFROI® metric, the model's distinguishing features include the manner by which we generate the forecasted stream of net cash receipts (NCR) and the method by which we estimate the firm's discount rate.

From a beginning asset base, the forecasted NCR stream is driven by variables that actually generate cash flows, namely economic returns, reinvestment rates (asset growth), and their expected patterns of change over time due to competition (fade). The discount rate represents the rate of return investors demand for making their funds available. The HOLT™ Valuation Methodology uses real discount rates, not nominal rates, so the rates remain consistent with the CFROI® metric result and other aspects of the methodology.

Benefits to You

An efficient, accurate approach to identifying valuation insights. The HOLT™ Valuation Framework helps clients identify valuation insights about a company quickly and easily, saving time and effort. It includes a robust database and valuation model that reflects a level of quality, depth, and independence derived only through the commitment and leadership of HOLT.

Comparability:

Variables - too many accounting conventions, too many inflation rates, etc. - make global comparisons difficult. Our common methodology for evaluation addresses global accounting issues to level the playing field and provide comparability over time, among peer companies, and across international boundaries. We calibrate variables as "real" numbers, thus removing distortions due to changing price levels.

Speed:

By emphasizing economic performance, clients can react more quickly and confidently to capitalize on investment opportunities and can avoid wasted research effort on "news" that has little real impact on value.

Insights:

Our comprehensive, unique Valuation Framework projects the likelihood of companies producing future corporate performance that differs significantly from current market expectations. Those differences can be understood in terms of sales, margins, and asset utilization, helping investors identify the critical drivers of value, and then key areas to monitor can be identified. As a result, a company's strategic actions can often be anticipated.

As a result, the client not only reconsidered its investment in the company but also identified other alternative investments within the industry that it had not previously recognized.

The HOLT™ Framework also delivers these benefits:

• A central platform with which to enhance the investment or analysis process.
  
• The ability to leverage the capabilities of an investment management team.
  
• A consistent discipline and holistic valuation approach across an entire portfolio, market, or global universe of companies.
  
• A common language with which to discuss corporate performance and valuation.
  
• A robust methodology with which to calibrate market expectations, articulate investment themes, and stimulate debate.