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

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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.
  • 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)