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You can find out more information by listening to episode 11 of this podcast.
Long-Term Growth Rate Assumptions – Show Outline
What is a long-term growth rate assumption:
- A key component of a discounted cash flow calculation. (Along with Discount Rate [Ep.23] and Owner’s Earnings[Ep.26])
- How much growth a company can expect in its earnings over an infinite time horizon.
How you can make long-term growth rate assumptions
- Bounds:
- 0% lower bound (no growth)
- 5%-6% upper bound (nominal GDP growth rate)
- Key components:
- Inflation
- Population Growth
- Productivity Growth
- Don’t assume that a company can grow faster than the economy in the long-term.
How to calibrate long-term growth rate assumptions based on management’s regulatory disclosures
- Example: Omnicom (OMC)
- Using management’s forecasts of 4% long-term growth rates, I lowered my growth forecast from 5% (matching nominal GDP growth) to match the 4% forecast by management.
- This lowered my calculated intrinsic value by 13% for Omnicom stock.
- Read the full Omnicom Intrinsic Value Report ($10/month – Patron Exclusive Benefit) [Become a Patron here]
References:
- Omnicom’s 2018 10k – Required Management Disclosures (pg. 11)
