Margin Fascination
Should a company with 40% margin get a higher multiple than a company with 30% margin everything else being the same?
Not really.
1/n
Should a company with 40% margin get a higher multiple than a company with 30% margin everything else being the same?
Not really.
1/n
If the margins are expected to go up (higher growth) then the stock should be assigned a higher multiple. 30% going to 35% is better than 40% coming down to 35%.
2/n
2/n
Margins do reveal pricing power of the business. Higher margins means you can sustain downturns without going into losses. It means competitors can’t force you out by dumping at lower prices.
3/n
3/n
But for valuations you are trying to answer two questions basically (proxy for FCF — the holy grail):
1. What’s going to be future ROIC?
2. What’s going to be future growth?
4/n
1. What’s going to be future ROIC?
2. What’s going to be future growth?
4/n
Margin movements are clues. But they usually get more importance than they should.
If you could know only two things about a stock it should be — ROIIC & Growth.
All the fundamental analysis is an effort to figure that out.
n/n
If you could know only two things about a stock it should be — ROIIC & Growth.
All the fundamental analysis is an effort to figure that out.
n/n
