At ODIN, we pay little attention to short-term share-price developments. We are interested in finding the best possible estimate of the value of the companies in which we invest. The stock market is in this sense only an arena where we try to buy companies far below their real value. Sooner or later, they will achieve their real value – and the patient investor benefits from this in the form of a high return.

The companies’ value drivers
In order to discover the value of a company, we must form an opinion on how the company’s key value drivers are developing. Below is a review of important value drivers here. These apply in all companies, sectors and regions – and never go out of fashion!

Top-line growth: Companies make money from selling goods and services. Top-line growth (increased sales) is the most important driver for long-term value creation and subsequent rises in share prices. In general, companies that are ”protected” against competition by having unique products and services are better able to create good top-line growth and achieve good prices. This ”protection” may, for example, be entry barriers in the form of a market position, capital requirements, knowledge and patents.

Operating margins: A company can increase its operating margins by obtaining higher prices for its products and/or reducing its costs. Unlike top-line growth, there is a limit to the length of time a company can grow by increasing its margins. All companies have a margin level (threshold) at which their capital requirement is met. The capital requirement is the return investors demand in order to invest in the company. A margin that is higher than the threshold generates shareholder value. Correspondingly, a margin below the threshold reduces the shareholder value.

Tax rate: Companies pay tax. Tax is a cash payment, and the tax rate level is a value driver in the same way as other cash flow amounts. The more tax a company pays, the less is left for creditors and shareholders.

Working capital and investment requirement: In order to grow, a company needs working capital and money for maintenance and new investments. The less of its capital it has to tie up for every sales dollar it generates, the more capital the company can spend on value-generating transactions. Changes in receivables, obligations and inventories lead to the cash flow statement providing a different picture of the company’s financial position than the profit and loss account does.

Required rate of return: A company that cannot meet the required rate of return also does not create value for its shareholders. As long as the required rate of return is not met, the company will reduce its value by investing in its operations. Fluctuations and patience At ODIN, we spend a lot of time studying these value drivers. This enables us to estimate the value of companies. We know that a company’s value fluctuates much less than the company’s share price. We use this knowledge to try to buy shares at well below their real value. As patient investors, we have time to wait for the share price to reflect what we believe to be the real value of the company.

A lot of money in washing machines
To illustrate how we use value drivers in practice, we can take a closer look at Whirlpool, a US white goods manufacturer (one of the companies in ODIN Global’s portfolio). In our opinion, this company is well positioned to create a lot of value for its shareholders in the years to come.

The company’s top-line growth in Latin America is very good and will gradually overshadow the weak US market for white goods. The company’s margins are improving and will be further strengthened by synergy effects, productivity improvements and cost cuts. The amount of capital Whirlpool has tied-up has fallen sharply over the past 20 years and it has practically no goods in stock. The company has a very strong cash flow and a rock solid balance sheet.

Following good 4th quarter results, the Whirlpool share is currently traded at USD 91. We believe the stock market has put too low a value on this company. In our opinion, its real value is equal to USD 140 per share. If the stock market comes around to our way of thinking, Whirlpool will help to create a good return on the fund.