Competitive Advantage Period: The Neglected Value Driver

Key Takeaways

• A company’s anticipated value creation depends on how much its ROIC exceeds its cost of capital, the amount it can invest and how long it can sustain a positive spread.
• This report focuses on the “how long” component through the concept of market-implied competitive advantage period.
• The report reviews the history of valuation and how analysts value stocks in practice, then examines the evolution of strategy to understand what types of advantages appear more durable.
• It also reviews empirical observations about U.S. public companies, including longevity, ROIC distribution, ROIC patterns and ways to model regression toward the mean.
• The report offers four methods to model terminal value, lays out steps to measure market-implied CAP and concludes with a case study.

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