Argus Research: Six-Point Valuation System Argus has been refining its proprietary valuation methodology ever since Harold Dorsey founded the company in 1934. Today, Argus deploys this proprietary six-point system (used by every Argus fundamental analyst) when analyzing the stocks in the Argus Fundamental Universe of Coverage. We believe this system, combined with our independence, gives us an edge as we develop our ideas, our forecasts, and our ratings.
The system, a blend of top-down and bottom-up analysis, begins with Industry Analysis. Our first step is to formulate a forecast for the economy and interest rates. We then collaborate with the respective Argus industry analysts to determine which industries are expected to perform well over the next one- to two-year period. Within each industry, the corresponding analysts identify industry-leading companies that are candidates for inclusion in Argus’ Fundamental Universe of Coverage. For those covered companies, Argus analysts assess each company's competitive position and its prospects within its industry.
Growth Analysis is the second step in the process. We forecast growth in sales, earnings (operating and/or GAAP), dividends, and cash flow for each company by studying growth in individual product lines, in margins, in the industry, and in the economy. We also look back, smoothing a company's historical growth rates in numerous metrics, including balance sheet items and industry-specific metrics, and analyzing them versus the company's peers and the broad market. This process also generates Argus view about the quality of a company's earnings.
Financial Strength Analysis is the third step. Argus determines a Financial Strength rating for each company in our Universe of Coverage. To assess financial strength, we conduct an in-depth ratio analysis, moving beyond the financial statements and into the footnotes of a company's publicly available documents, this to understand fully the company’s obligations and opportunities.
The fourth step is a qualitative Management Assessment. In short, our analysts need to know management in order to make a recommendation on a stock. To do this, they attend meetings, presentations and road shows with senior managers, travel to corporate facilities, and participate in conference calls.
Risk Analysis is the fifth step. Argus considers risk from both a qualitative and quantitative standpoint. On a qualitative basis, we review each company in the context of Harvard Professor Michael Porter's Five Forces model to determine potential threats. On a quantitative basis, we analyze and monitor proprietary data from our sister company, Vickers Stock Research, regarding institutional and insider ownership trends. We conduct a regression analysis to determine the correlation of a company's stock returns with the market's returns, and we determine the predictability of the relationship. We also measure the volatility of key financial statistics such as sales growth, earnings growth, and margins. Finally, we determine a fundamental floor for every stock in our universe, which leads to our Valuation Analysis.
Valuation Analysis is the final step. Over the years, we have developed and refined a multi-faceted proprietary model to assess valuation. First, we compare a company against its peers on metrics such as price/earnings and price/sales ratios, as well as dividend yield. Second, we analyze stock price activity in terms of annual sales, cash flow, dividends, book value, earnings, and earnings relative to the S&P 500. We determine normal ratio ranges for these various parameters, and then adjust the ranges going forward based on trends in a company's growth and profitability. We apply the adjusted ranges to our key sales, earnings, and cash flow forecasts to arrive at a normal trading range. Once the range has been determined, we use two-stage and three-stage dividend discount modeling to arrive at a target price that we estimate can be achieved over a 12-month period.