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25 - Long Term Growth Rate Assumptions: How to Calibrate using SEC 10k Disclosures

The DIY Investing Podcast: Value Investing | Fundamental Analysis | Mental Models | Business Management

Release Date: 05/05/2019

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Long-Term Growth Rate Assumptions - Show Outline

The full show notes for this episode are available at https://www.diyinvesting.org/Episode25

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.

References: