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HomeMy WebLinkAbout2009 02 17 Regular 600 Moody Aldrich PresentationDate: February 17, 2009 ATTACHED PRESENTATION WAS EMAILED AND MAILED TO THE BOARD MEMBERS PRIOR TO THE MEETING MQODYALDRICH PARTNERS INVESTMENT MANAGEMENT PREPARED F®R THE PENSI®N ADVIS®RY I3®ARD F®R THE CITY ®F INTER SPRINGS CaENERAL EMPL®YEES' PEN~I®N PLAN FEI3RLJARY ~ 7, 2®®9 PRESENTER ELI I°CENT- PRINCIPAL, MANAGING ®IRECT®R M®®DY ALDRICH PARTI`II~RS • Since 1988, the firm has provided a specialized equity investment style to institutions and high net worth individuals • Privately held -our economic interests are aligned with yours • Over 115 years of total investing experience informs a proven approach we call Multi-Dimensional Value Equity Management • $800 Million in Assets Under Management Assets Managed by Market Capitalization Micro Cap (<~zooM~ Z~~o ~- Large Cap (>$lOB) ZJ% Mid Cap ($2B - $lOB) i9% Small Cap ($200M- $2B) ~~% MAP P~®PLE Investment Team (Biographies included in the appendix) William B. Moody, CFA, Co-Founder, Managing Principal, Portfolio Manager Amory A. Aldrich, Jr., Co-Founder, Managing Principal, Portfolio Manager Michael C. Pierre, Principal, Portfolio Manager James O'Brien, CFA, Associate Portfolio Manager Sarah L. Westwood, CFA, Associate Portfolio Manager Marketing & Client Service Eli S. Kent, Principal, Managing Director and Portfolio Specialist Michael J. Cooney, Director and Portfolio Specialist Jacqueline O. Easterbrooks, Marketing & Relationship Manager Lindsay M. LaRocca, Marketing Assistant Operations, Administration & Compliance Margaret Leonard, Chief Compliance Officer, Director of Operations Catherine Bachini, Office Manager Jason Ries, Portfolio Administrator and Trading Specialist John Sherlock, Portfolio Administrator and Trading Specialist Boston Investor Services - An outsource agency providing some portfolio administration functions MAP UIDII~IC PRI1`ICIPLI~S Our goal is to deliver superior long-term investment performance • We believe that value investing offers the most advantageous balance between risk and reward • We go beyond conventional measures of value that point to "statistical cheapness" and identify misunderstood companies where meaningful disconnects exist between price and value • More inefficiencies and high return potential exist among small and mid sized companies, neglected stocks, and certain special sihaations experiencing positive change • Timing is critical to value investors. We monitor Earnings estimate momentum (EEM) to avoid value traps and improve investment timeliness MAP 3 THI1`ICS 1~ 1`II~1~D TO C~l~T RIGHT T® ~111`I 1. IDENTIFY A FUNDAMENTALLY SOUND OPPORTUNITY • Business and company strategy Visible path of end market expansion • Capital allocation strategy, shills, vision • Financial trends that drive ROIC • Levers of change, catalysts, drivers of value Industry/economic factors • Competitive advantages 2. DETERMINE WHAT THE OPPORTUNITY IS WORTH • Intrinsic value measures: discounted cash flow analysis, economic value added (EVA) • Relative measures: P/B, P/E, P/S, Yields, ROE-to-P/E versus history and peers • Assets, sum-of--the-parts, breakup 3. ASSESS TIMELINESS • Earnings estimate momentum • Business momentum MAP 4 TIMI~LI1~I1~SS Combine value investing principles with Earnings estimate momentum (EEM) to: 1. Improve timeliness of new buys 2. Help avoid value traps 3. Enhance returns EEM reflects the rate of change, magnitude, and directionality of analysts' earnings estimates, as well as company results and trends and a qualitative overlay Companies with rising estimates typically outperform companies with declining estimates* After our research has identified an attractive investment idea we look at EEM and avoid buying companies that exhibit exceptionally poor EEM * Please see _-1~~endix for srip~orting his~torieal data. MAP IMPACT ®F' 1~AR1~iI1`ICS 1~STIMATI~ ®MI~1`ITU HIGH STOCk PRICE LOW • Earnings estimate momentum causes us to buy and sell later than more traditional value managers, mitigating time risk • As a result, we frequently avoid the final "washout" phase of a stock's normal bottoming process MAP SILL DISCIPLII`II~ 1. Quantitative -juxtaposition of valuation and earnings estimate momentum over Valued z 0 ~' Fau-1~ SELL HOLD ~ Valued d Under Valued Declining EARNINGS ESTIMATE MOMENTUM 2. Qualitative -deterioration of investment rationale - Fundamentals breakdown - Strategy shift/drift in focus - Catalysts do not materialize - More compelling investment is found Accelerati<ig MAP I~IS~{ MAl`IACI~MI~1`IT In our view, risk is more than simple volatility - it is the potential for permanent loss of capital We are proactive in our efforts to mitigate the three key sources of equity risk: Unsystematic (Stock Specific) Risk: - Maintain diversification in terms of industry, sector, and number of stocks - Review position weights daily to prevent over-concentration - Apply highly conservative assumptions in modeling - Analyze correlations of current and potential names to prevent unintended bets Systematic (Market) Risk: - Assess portfolio beta on a regular basis Timing Risk: - Monitor earnings estimate momentum to improve investment timeliness - Consistently apply sell discipline MAP WHY MOODY AL,DRICH MAP Fenhr~e Specialize in Small & Mid sized companies Multi-Dimensional approach goes beyond traditional value measures • Neglect • Earnings estimate momentum Privately held Client Benefit Proven ability to exploit market inefficiencies leads to strong returns Enhances probability of strong absolute returns by limiting downside and avoiding time risk Our financial interests are aligned with your investment performance MAP 9 MAP I1`I~I~STME1~iTS Two types of investments 1. Solid Value Opportunities -Quality, high operating performance companies whose stock prices reflect market neglect, resulting in their shares underperforming for non-structural, short-term reasons 2. Special situations -Companies in transition that may be restructuring and/or experiencing positive change Attributes of buy candidates • Distinct undervaluation • Visible path of end market expansion and durable competitive advantage • Catalysts to improve operating returns and earnings • Significant free cash flows and return on invested capital (potential) • Financial strength to execute business strategy • Timeliness MAP 10 ~®CUSi~L~ ~IALUE: P®RTF'®LI® C®1`ISTRU~TI®1`I • Minimum of 10% in each cap range (<$2B, $2B to $ l OB, >$ l OB) • Concentrate in 25 to 35 stocks, 3% to 5% at purchase, 7% maximum in any one stock, up to 50% in top 10 • Sector weights and cash are residuals of the bottom up process and are not engineered to mimic indexes • Maintains reasonable diversification across sectors • 40% maximum in any single sector • 25% in any single industry • 0% to 10% in cash should be expected • Up to 10% in ADRs and shares of foreign securities that trade on a U.S. exchange • Low dispersion among accounts, unless the client directs us to exclude certain stocks • New accounts are invested almost immediately to reflect a model portfolio excluding near term sell candidates MAP 11 F~OCUSI~D VAL,UI~: TOP '~ O H®LDI1`IC~S AS OF' DI~CEMBI~R 3'~ , ~,®08 Company Name Portfolio Weight Mueller Water Products 6.3% Rayonier Incorporated 42% Southern Company 4.2% Baxter International Incorporated 4.1% Old Republic International 4.0% Travelers Corporation 4.0% East West Bank 3.9% Nexen Incorporated 3.9% Wells Fargo & Company 3.7% Commercial Metals Company 3.5% Percentage of Total Portfolio: 41.8% Toy ten holdings are presented as s~~pylemental to the fi~llr con~pliantGlPS~resentaiion located in flee appendia~. ©®~ 12 ~®CUS~D ~IALU~: R~~~1tIT BUYSISELLS Recent Buys: Recent Sells: • Solid value opportunities Terex • Goodyear Tire • AT&T PPL • East West Bank • Travelers • Special situations • Calpine MAP 13 ~®CUSI~D ~IALUI~: MARKI~T CAPITALIZATI®l~i Focused Value Market Cap Breakdown Over Time 100% 90% 80% 70% 60% >0% ~0% 30% 20% 10% 0% ~^ tia Rtarl~et capftah-atior~ tia~eights rn~e preseY~ted as s~ipplemey~tal to tJ~e filly cotnpliantGlPS presenta~on located in flee appe»dis. 14 ~~ ~~ O~ O~ Off' O~ Off` O~ O~ O~ O~ ~°l ti~ ,~O ,~O ,~O ,~O ,~O ,~O ,~O ,~O ,~O ^ Small Cap < $2 Billion ^ Mid Cap $2 - $10 Billion Large Cap > $10 Billion F~OCUS~D ~IALU~: SECTORS Sector Weights as of December 31, 2008 >>.0 ,0.0 25.0 20.0 15.0 10.0 ~.0 0.0 v ~~ ~~~ ~~ ti ~ 7~ ~ . ~~ ~ ~~ `~~ ~~' ~~SV Q'~ Q ~~ ~'4 Gti Sector ~-reights are presented as sr~pplemental to the frrllr compliant GIPS presentahon located in the appendit. ©~ 15 F~®CUSI~L~ ~IALUI~ ~ CHARACTI~RISTICS AS ®F' I~l~CI~MBI~R 3 '~ , ~,®®~ Moody Aldrich Russell Focused Value 3000 Value Number of Holdings 33 1947 Median Market Cap $2.9B $0.6B Weighted Average Market Cap $19.6B $80.9B Turnover (3 Yr. Annualized) 49% 20% P/E (1 Yr. Forward) 11.0 10.4 Price/Book 0.9 1.3 EPS L.T. Growth Forecast 12.5% 8.8% Dividend Yield 2.39% 3.72% DPS Growth (5 Yr. Historical) 12.3% 12.1% ROE (Trailing 12 months) 12.5% 16.1% Beta (5 Yr.)* 1.17 1.00 Standard Deviation (5 Yr. Annualized) 17.31% 13.30% *Foc~zs~ed yahze vex°s~~zs Rzrss~e113000 yahre Characterishcs are presented as sxpple~nental to the jiilly eoirrplfant GIPS presentation located in the appendi~~. Statistics m~e calczdated using gross of jee performance. MAP 16 F~®CUSED VALUE: R~TUR1~iS A~ ®F' D~~~M~~R 3 '~ , ~,®®~ Annualized returns forperiods ending December 31, 2008 4Q0g Focused Value (gross) -24.4% Focused Value (net) -24.6% Russe113000 Value -22.4% Since 1 Year 3 Years 5 Years Inception* -40.9% -8.8% 2.8% 11.5% -41.3% -9.4% 2.2% 10.6% -36.3% -8.3% -0.7% 2.7% Returns for pel^iods less than one year are not annualized. Past pe~forrnanee is no g~iarantee of f ~t~dre resz~lts. Please see flee Jt~lh% compliant GIPS presentation located to the appendix. *Inception date 12 = 1 )- ©® 17 ~®CUS~D VALUE: CAL~I~iDAR YEAR R~TUR1`IS 2008 2007 2006 2005 2004 2003 Focused Value (gross) -40.9% 6.1% 20.7% 22.6% 23.6% 59.1% Focused Value (net) -41.3% 5.5% 20.1% 22.1% 22.9% 57.7% Russell 3000 Value -36.3% -1.0% 22.3% 6.9% 16.9% 31.1% 2002 2001 2000 1999 1998 Focused Value (gross) -2.3% 2.3% 24.5% 28.5% 12.8% Focused Value (net) -3.3% 1.4% 23.3% 27.3% 12.0% Russell 3000 Value -15.2% -4.3% 8.0% 6.7% 13.5% Past peg Jormance is no g~rarantee offirtirre results. Please see the firllr compliant GIPS presentation located in tF~e appendix. ©® 18 ~®~USED VALUE SEER R®UP RA1`IKII~i~ ,411 .. .... .... ..._ _... ,. _ ._ .. ,... .. ...... .. -... _. 12.0 1 p.p .. ... ... ... ... ... ... .... ... ... ... tfr riu. . 8.p 4.p .: ............ ..........---- 1.U .~I ..- .. .... ... .... ....-_ p.p -2.p ~ _ -4.p --- -8. p - - -1p.p - -- -12.0 ~ -- - 14.0 18.0 --- ___ ^ :i Vrc h Vra f Yrc 111 Vrc ~ AIV-sP Fncusetl Value ~ F Benchmark:-Russell 3000 Value Hotumc: 'i,?, ! L{ 1U Yrr aA All L7p if .lua tq..lity 34rs BYrs 7Yrs 'IpVrs ~~I~ PCI4CIILIIC ~ nn Pen:ernne 6,38 ~ .4 ~~ 0.38 ~ s .3R 8.33 i 4 Ors 10.01 ~ r nn ~ c inn 75th reroerrt ile 9~LI1 Pel gel ll ila 9.90 ! -10 F9 -1 .BS ! -5A4 6.36 2.19 422 ! 2,39 Rnn ri'rnduwt VT RM ~ Yrs Rank 5 Vrs Rank 7Yrs Rark 99 Vrs Rank h,tnPFoou~ed~hluc ISA IGF 1 8,88 Bp 1 2.76 20 1 8.82 3 i 111 2 1 Qenc hrnark: Ruascll 3666 Va lus IIa+A IWA -02C Cp -9.72 79 9.09 GO 9.C0 89 Pastpeffor~mance rs not indicative off~rhrfr~e resfdts. Retru~ns ar e presented gros s of fees. Sofrrce: ci eshnent ~Tliancc, e~~ ~T7 Cap i afire Eyfnt~~- L'.S. Equim prodrrcis chat investpr•imari]i~ in small, mid, and large capitalisation stocl,-s with vahre char~acter~s~fics ©~ 19 ~®~USI~D VALUI~ PI~RF'®RMAILI~I~ ~lS. U1`II~II~RSI~ 11~n R:rtin 1 .2 . 1 .0 p.8 u.c . - 0.4. - u-~.- p.0 p.2 p.4 `~- p.0 p.8 Inin R~In ~ hAFSP M rT Okats: 3 Yrs va. Ru.saell pp00 Value Fxr.~s~ Rretrurl O.p ~ n .. a.o -' d.p a.o -s.u 2.p 1.p u.u -1.p -2.p --s.u .,. I -4.p ; _~ ~ , a.ul , Pr racc Rrnc } hApP dnnrrnlia~:rl GII~l7~ 0 .p ~.u c .u !S n •t fl ~ p .p 2.p I i.u i u .u -I n - -2 .p 3 .p -~.u o .u Calrh a hdpP 5 Years Ended 12/31/2008 eSll~ri>,~ Riltirr 0.2 N 0.0 .. -p .2 -0.4 i 1 V Shama { hdAP eA All Cab VaIVG C 7!9rh Pam arnlla g n !S7 ~ .i I n ~ .~ 4R ~ -n n!S j Mri li.~ii n a~ an9 ~ it .n 1~ zscr, rercerRile -pat ~o_9a -p.zz ~o_p1 U6th facro entllc U ki u ~ i ~.U2 ~ ~I .1 G ~ U.61 3~r I i~af nnc ~r7 3~+7~ rtn ro- - - a la an i - xaooa na n s - p s - arx an s rUWP Fu~uneU Value , 3R , 0 F ~ p~ 0 Ap 3.v 1 20 433 10 -0 DF 19 Pastpe~for~mance rs not indicative off~rhr~r~e reszdts. Retru~ns ar e presented gros s of fees. Source: ci eshnent ~Tliancc, e~~ ~T7 Cap i afire Ey1nt~~- L'.S. Equim prodrrcis chat investprimarih~ in small, mid, and large capitalisation stocl,-s with vah~e char~acter~s~fics ~~ 20 ~®~USI~L~ ~IALUI~ ABS®LUTI~ RISI°~ ~lS. RI~TUR1`I Periods Ended 12/31/2008 Rixk.-F~~ww~r~ il: 71l Y~ 15.0 12.0 it II u3 ~ B.p 3.p nn 9.a 14.0 i ~ F¢¢~~~~ ~IUt Rids Rovrrd: 90 Yr~ 19.0 24.0 29.0 a~.a ~9.p ~#cl r}~viati+~u p a}k~',II Cap ~hluc 6quRy ® Benohmorlc: Ruoocll 3000 khluo ~a.a ~.a I Univcrva Mcdion Pastpe~formance rs not inclicatrve off~rhr~re reszrTts. Retzrrns arc pr~esentec7gros~s of fees. Source: Ei eshneni_~Tliance; e_~ _~T] C'ap i Uhre Eynih~- US. Ey~rith products that irrvestprrmari7y~ in small, nricl, ancllmge ca~italr~atron stocl,-s tii~ith vahte charracter~rslfcs ©~ p 21 F~OCUS~D VALUE MARKET CAPTURE Periods Ended 12/31/2008 Ui>~~i~lc v~. C-o~r,r~i ~i~l~: 5 Yr~: vim. Ru~~~ll 3~4~ ~Jtd~~~ 170.0 159.0 a '1+ 1: iSJ II ~ r °~ r ~ '~' ~ ~ ~ ~ ~ 179.0 ~ ~` ~ E~ 99.0 ~~ ti,e} ~ r ~ ~ ~ « .~. P E>~ 4 ~~ 79.0 ~,q ~ p h !1SJ II ~ a.u ~~.u 4~.u az.u ~~.u iu~.u i~E.u i~z.u i~~.u i~t.u ~ul.u ~~~.u a~~.u za~.u ~~E.u f~~ruuii Cuil~f 1'.~~j1'lii~+~ # h_A~P Focusad 1-~lua ~- a.4 lsll Cep U51ua Equity + Univarra h~iCdi~n Pastpe~formance rs not inclicatrve off~rhr~re reszrTts. Retzrrns arc pr~esentec7gros~s of fees. Source: Ei eshneni_~Tliance; e_~ _~T] C'ap i Uhre Eynih~- US. Ey~rith products that irrvestprrmari7y~ in small, nricl, ancllmge ca~italr~atron stocl,-s tihith vahte charracter~rslfcs ©~ 22 ~®~USED VALUE SERF'®RMA1`ICE VS. ~E1`ICHI~ARK Periods Ended 12/31/2008 a5.o ao. o a5.a su.u ss.o y 20.0 15.0 iu.u F~ollinrl 3 Year ~etl~u i~ s inc~ h eel}xioi i 5.0 o.o -5.0 -10.0 ~~ -10.0 -5.0 d.0 5.0 • FVirsP Foouot:d Lhluc 1G.0 15.0 40.0 45.0 30.0 -35.0 40.0 4-5.0 ~41i~~llllif E`. ~~?f1117iS ¢ Bcnohmarit: Ruaacll 300G ~hl~t: Past per formm~ce is not rndrealive of f ~hn~e res°~rlts~. Rehnns ai c yresentec~gros s of fees. Source: ci eshnent ~Tliancc, e~~ ~T7 Cap i afire Eymt~~- L'.S. Equzm proc7rrcis chat znvestprimarih~ rn small, mid, and large capitalisation stocl,-s with vah~e char~acter~sfics 23 F~E~ SCHEDULE Focused Value First $10 Million 1.00% All Additional Funds 0.80% Minimum Account $5 million MAP 24 I1`IV>~STM1~1~IT T1~A BIOCRAPHI>~S William B. Moody, CFA, Co-founder, Managing Principal, Portfolio Manager Bill is a founding partner of Moody- Aldrich Partners, ~yluch ryas established in 1988. He ryas Co-founder, President and Cluef Investment Officer at De~yey Square Ins-°estors from 1982 to 1988. Previously, Mr. Moody- ryas Seiuor Vice President and Head of Instihrtional Investment Management at Baiil~ of Boston for fourteen rears. - Syracuse Uiu~-ersih, BS in Economics - Member of the Boston Securitti~ Analysts Societe- and the CFA histihrte Amory A. Aldrich, Jr., Co-founder, Managing Principal, Portfolio Manager Amoi~~ is a founding partner of Moody Aldrich Partners, ~yluch ryas established in 1988. He ryas Co-founder, Director of Research and a Portfolio Manager at De~yey Square Intl°estors from 1982 to 1988. Preciously, Mr. Aldrich ~tias a Portfolio Manager and Director of Quantitative Research at Baiili of Boston for fourteen rears. - Uiuversity of Ne~y Hampshire: MS in Mathematics - Worcester Polvtecluuc Instihrte: BS in Physics - Member of the Boston Secnrite- Analysts Societ< Michael C. Pierre, Principal, Portfolio Manager Mike is a Principal and Portfolio Manager at Moody Aldrich Partners. He ryas a Portfolio Manager and the founder of Pierre & Company. Prior to establislvng Pierre & Company, Mr. Pierre «orhed as a Portfolio Maiklger and Analyst at Moody, Aldrich & Sullivan. He ryas also an Associate at RJS Capital Management, a Fluid Accountant at the Boston Company, and a Financial Consultant at Menill Lynch. - Uiuyersitti~ of Notre Dame, BA - Member of the Boston Security Analysts SocienT MAP 25 I1~I~ll~STIVII~ILIT T~l~AI~ BI®C~RAPHII~S James M. O'Brien, CFA, Associate Portfolio Manager Jim joined Mood~~ Aldrich Partners in 200 as a Senior Analyst. Previously, he was an Egnit< Research Analyst at Citizens Funds for four years. Prior to that, he was a Financial Analysis Technology Strategist at Primarli. Mr. O'Brien's experience also includes Financial Technology Business Development at One Source Information Seri ices, Senior Fund Accountant at Fidelity Investments, and Account Specialist at Boston Safe Deposit & Tnist Company. - Bentley College, Masters Certificate in Accountancy, BS in Econonucs and Finance - Member of the Boston Securit< Anal sts Socieri and the CFA Instihrte Sarah L. Westwood, CFA, Associate Portfolio Manager Sarah joined Moody Aldrich Paitiiers in 2008 as an Associate Portfolio Manager. She began her career as a Research Associate for Hai~~ard Business School, and later joined Cobey, Jacobson, and Gordon, a boutique contrarian investment management fii7n seiti°ing high net ~tiorth clients. She ~~~ent onto sei~-e as a Senior Vice President and Analyst on the Strategic Research Team at Putnam Investments. A former Captain, Militaiti~ Intelligence. U. S. Army Reseiti e, she seii ed in Baghdad for ten months during Operation Iraqi Freedom, 2003-200. - Wellesley College, BA, Plu Beta Kappa - Member of the Boston Security Analysts Societ< and the CFA Instihrte Eli S. Kent, Principal, Managing Director and Portfolio Specialist Eli began lus career at Fidelity Investments as an Institutional Client Manager. He also worked at MFS Investment Management in instihrtional sales. Eli joined Moody Aldrich in 2002 as a Director of Marketing and Client Sei~~ice and became a Principal and Portfolio Specialist in 2006. - F.W. Olin Graduate School of Business at Babson College; MBA with high honors - St Lawrence Uiuversit<, BA in Govenunent and History MAP 26 SCF~>~)~1`II1`IC l~I®D>~L • The following factors are weighted for each stock in the muverse: - P/E normal - 21% - Price/value - 21% - Quality ratil7g - 10% - Growth persistence rating - 10% - Growth rate, projected - 10% - Retun7 on equity(ROE), normal - 10% - Earn momentum percentile - 4% - Price momentum percentile - 4% - Value/momentum percentile - 4% - Return on assets, current - 4% • The muverse is ranked based on each company's score and we look at the top 150 Ontpnt Characteristics: Undelti-alned (based on di~~°. discomfit model), Low Normalized P/E, High ROE, Reasonable Qnalit<~ and Stabilit<-, Growth Persistence, Some Positive Earnings and Price Momenhun Definitions: Ford Investor Services provides the data fields 1 P'E nonual using 12nro earnings. Price value ratio, or current share price divided by intrinsic value bayed on Ford's dividend disconnt model. Identifies comp:mies which m'e underpriced or overpriced conrpm'ed to their inh'insic value. A value of 1.00 is considered neutral, below 1.00 is undervalued, and above 1.00 is overvalued. 3 Quality rating indicates financial strength and earnings predictability, ranging from ~ :+ to G (or 1 to 9 numerically). B- (6) is a~ erage. Qualitc rating considers company- size (as measured be mm'ket capitalization and%or mmual sales, historical stability of em'nings, flnmrcial condition, principally debb'equity ratio, and stability of the nrm'kets in which the company operates. ~ Crro~m#h persistence rating indicates past and eipected fiiture consistency of earnings gn'o«th, ranging from ~ to D (or 2 to -1 numerically). C (0) is a~~zrage. Based prim:u'ily on the conip:uiies refir7i on equity mid continuity of em'nings growth, in addition to consideration of the debt; equity ratio. 5 Groom#h rate, projected for earnings and dividends for the neit 10 } ev's, in ° o per year. Frojected growth rate is a projection of the amiual per-sh:u'e earnings groccth ~~hich can be sustained o~~er the coming decade. The factors used as a basis for this figure are: (1) reinvestment rate, as a percent of equity, (2) historical e:urrings gr'ommth over the past decade, with greater emphasis on the more recent tears, (3) growth implied be published estimates of earnings o~°er the nzst few tears, (&) sales growth oaer the past decade, again with greater emphasis on the more recent tears, and (~) published analysts estimates of ~'owth for the company and for the markets in ~m-hick it operates. 6 Return on equity ,normal is equal to normal emrrings available to conmron shm'eholders divided by conuuon equity, in percent. ROE is updated w ith the latest earnings release, along with earnings and book ~ aloe. If the denominator is negative, the number 99.9 is used. - Em7iings momentum percentile measures the acceleration or deceleration in earnings growth for the 12 months Op EPS aeries ending in each of the last ~ quarters including mr estimate for the current quarter (percentile, 100 best). s. Price monrenfim percentile is a predictor of near term firture refirns, based on historical price changes (percentile, 100 best) 9 t"aluehnonrenhun percentile combines acceleration of e:u7rings growth with relative value and price momenfinr. Ford's Emnings ylonrenfim, IBES Stlndm'd Unexpected Em7rings and the one month change in the IBES consensus emnings estimates for FI' 1 mrd FI'2 m'e combined with earnings cield (based on Ford's operating e:u7rings for the last tln'ee qum'ters and the current qumter estimate) and Ford's Price 1~4omenhun. io. Refirn on assets, current calculated as current e:u7ringa available to conunon shareholders, divided b~-total assets, as of the latest fiscal tear-end, in percent. 27 TIMI~LI1`II~SSf ~AR1`II1`ICS ~STIMATI~ M®MI~1~ITU Earnings estimate momenhlm (EEM) measures the rate of change of analysts' estunates. It is used on the buy side as a filter after our research has identified an otherwise attractive investment idea. If the new idea exhibits exceptionally poor EEM, we will be patient and wait before committing fiends. The following bar chart shows the efficacy of earnings estunate momenhun using Zacks rankings. (1= top 5%, 2=15%, 3=60%, 4=15%, 5= bottom 5% of the US domestic equity universe ranil~ed by EEM) As vahle managers, we supply want to avoid buying companies whose earnings estunates are declinning (we are not trying to "buy" positive earnings momentum). Compound Aimual Elcess Return (o~ er S&P 500) 12/1987 - 9/2006 20.02° o 9.6~° u 0.31° o 0 -(i.9~1°0 -J. o Decliiung Accelerating Earnings Estimate 1~iomenfim Scrn~e Graph Source: Zacks hwestmentResearch MAP 28 °o 0 p/ ~ V " M '^ {~ Ll5 ~ n C _ ~ Q ~ E _ ~ n ~ O 3O v CJ -~-~ ~ O m ~, ~ .~ O ~ `,~ `,~ O ~ ., ~ ~ .~ ~ w o w O ~ (j ~ CJ °~ 3 U 00 ~" ,N V ,s.' ._ O ~" U ~.' U O U vi ~ ~. ,~ U O ,~. vi ~ w p u~i '~ ~ si ~ N O\ ~ .+~~' p 'OU" ; ~, m "" Q" s~ O ' i. P, '+~-' O ~ `~' ~ U ~ `~ O ~ ,~ U '3 ~ U O cYC U ~, YO ~ by O U U '"a `~-~ ~ ~ O ~' u~ 0 p..i ~ U '~ 0 ~ O ~ m ~ U L." . s.J' P-i ~ ~' O ~ ~ ~ ,~ ~ aOi ~ ~ ~ ~ O ~ a+ ~ O ~ m ~ '"~ o w O ~' m ~ ~j 0 . ~ U Q. a1 '~ by ,~,' ~-+ ~ ~ ~ o ~ U ~ ~ o s-. U ~ yU, ~ 'd '~ ~ O N ~' O ~ ,~ OO ~ Y Cd ~"r Y ~ U '~ O ~i N Cd m O ~ N O ,~ m~ 0 U O~ i.~' Y ~-i 'U~ Y ~ U ~ U p~ p~ ~ flI O ~ ~ 'y ~ O O Y Y ~ "a Q-I ~ ~ O N L~-I ~ QQ y ~ ~ '~I CC S~y U ~ r~ ~ ~ Q U '~ ~ cC O '~ ~ ~ O v ,~ i. 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U V~ U Cd ti U 0 ~., ~ O ~ ~ ti U W s~ cd U ~ ~ .~ ~ ~ .y ,,'~ N O ~ U ~ ~ ~ 'C~ 'C~ ~"" ~ O '~' O ~" ~ C ~ ~ oo ~ oo ~ ~ ~ ~ ~ ~ chi ~ ~ ~ ~ ~ ~~ ~~ ~ ~~~ o~ ~ ~ ~ ~ ~ o,~• ~' ~ ~ o ~. ~ ~ ~ ~ ~ ~.~ ~°~-o ~ ~ ~ ~ .~ ~" ~ ~ U ~ ~ ~ '~ ~ U ~ ~ ~ ~ U ~ ~ U N ~ U N i-i ¢, ~ O ~ 4~ ~ ~ -o ~ U F" ,.~ .,may ~ ~ ~ .~ ~~~~a. W ~--~ a.~ ~~ ~~ ~ ~ W ~~~~~ o ~ ,~ ~ .o ~ Z o ~ O ~ N _^ .~i O ~ O ~.0~ ~ ~ ~y p ~ O ~ W o 'o N O ~' N "C O ~, a~ '~ O U ~'" ~" ~, ~~~°~, ~.~ ~'~ ,~ ~ O ~ ~ ~ ~ ~ fir" ~--i i-i ~~'~~H ~ o O U W ,~ ~ ~. Q ~' O ~ o ~ ~~Z~O~ ~ U ~--~ 'r N N N ,Si ~ E'~ W W W ~--~ CC "C ~ ,~ ~ 'C '"~ ~ 0 0 O 0 c~ N ~ p ~ cGC c~ a~ C~ ' s--~ ~ ~" ~, ~ 4-y N O ~' ~ ~'," ~ ~ . ~ ~ ,~ ~ ~ ~ ,~ ~ _~ O Y ~ ~~ ~ ~'y ~ ~ ,may M o ~,~." ~ I-~ ry O ~ O O a ~ ~ ~ ~ ~ ~ ,7, 69 ~ ~ ~ ~ ~ ~ U ~ +ti ~ U O ~' ~ ~ Li ~ ~ U b4 N `}'' O o ~ ~ ~.~'+~~ 3o~~ra _ ;~ ~ oA ~ '~ ro v N ~ '° ~ ~ Q `~ ~ ~ ~ ~ °o N ~' p ~ F+ ~ ~ N ~ U N cC ^~ ~ ~ ,~....II t}~J ^ y 0 ti y o ~ i-I w ~~ Y ~ V 0 ~ ~-= cN '~ ~ r"' i. _ ~ ~ ~ ~+ ~ ~ N U ~, ~ 69 ~ ~ N ~ ~ O c~ ~ ~ ~ ~ M ~ ~ ~ O E-~ ~ N ~ ~ ~ 'C ~. ~. ~ ~ ~ ~ ~ ~ ~ ~ 0 ~ ~ Q ~ ~ ,~ ~ ~ "~ ~ ~ co ~' : c~ ~ O ~ O Y ~ ~ N ~~.' > ~ ~ C'J ~ ~ i r~i~ , ~ ~ ,~ CSC ,OQy +~ ~ ~ ~' E~ ~ °~ ' ~" s.. ~ ~ ~ ~ O ~ o H s' P~ c~ H ~ w ~ ~ ~ ~ ~ ~ ~. ~ MOODYALDRICH PARTNERS INVESTMENT MANAGEM ENT ~~>>~>>~~. r~zoodvaldriclz. cony