The EVA framework involves economic performance measurement, performance based capital allocation policies and owner-like compensation.
EVA often catalyzes value creating actions like: Spin-offs, Acquisitions, Share Buybacks, Asset Sales, Restructuring, Recapitalization, Lean and Six Sigma Programs and Profitable Growth Initiatives.
EVA Companies produce more wealth over time (see 1 & 2 below)
Value Investing with EVA
We buy stocks of companies with improving EVA at a discount to their current share prices.
That is where EVA comes in. Companies that have adopted Stern Stewart’s EVA framework for performance management, value-based planning and incentive compensation have realized a very high return.
As reported in a prior Stern Stewart study, companies that implemented the EVA framework in the 1990’s outperformed their peers by an average of 8.3% per annum over the five years following adoption and created total excess shareholder wealth of $116 billion.
A separate academic study demonstrated that substantial improvements in EBITDA and operating margins, faster assets turns and stronger cash flow generation were the drivers of the superior stock market performance.
Looking for companies that use these EVA principles has been a profitable strategy. In 2001 Berk and his partners at Stern Stewart & Co. set out to find the factors that make an EVA company perform so well. Called the Shareowner Alignment Index, they found that shares of companies that shared a set of Best Practices, which they called "Value-Aligned" companies, consistently outperformed their peers by as much as +16%; the Non-Aligned companies underperformed their peers by -4%.
We look for, analyze, monitor and invest in these ValueAligned companies.
Some portfolio managers use EVA as a valuation tool; No-one , other than us, systematically invests in EVA companies.
EVA is a trademark of EVA Dimensions, LLC. EVA Dimensions, LLC or Stern Stewart & Co. are not affiliated in any way with Berk Advisory or Rapidan Capital, LLC.
1The results above were from a study that analyzed total returns to shareholders for up to five years after companies began to use EVA to manage their operations, instead of managing for earnings. On average, investments in the shares of these companies produced 49% more wealth or $116 billion after five years than equal investments in shares of competitors with similar market capitalizations.
2Past Performance is not a guarnatee or a prediction of future performance. Due to individual investor requirements, this information should not be construed as advice meant to meet the investment needs of any investor. This information is not an offer to buy or sell, or a solicitation of an offer to buy or sell any securities.
We are equally committed to creating wealth and value for shareholders, and one way we do so is through our unwavering commitment to Economic Value Added (EVA®). This enterprise-wide metric provides a consistent and transparent way to translate strategy into investment decisions and compensate all key managers in the Company based on performance. We have also sharpened our focus by welcoming three new directors to our Board who bring tremendous global business experience as well as strong perspectives on EVA and continuous improvement.
EVA discipline also drove our restructuring initiatives in the fourth quarter of 2008. As the economic climate deteriorated, we took necessary countermeasures that included rationalizing facilities, renegotiating contracts, amending benefit plans and trimming our global workforce. These initiatives should save more than $50 million per year, with a majority of these cost savings being realized beginning in 2009.
-Harsco's 2008 Annual Report
We also will continue to employ Economic Value Added® as a framework and guide for the creation of superior, sustainable value for shareholders. As such, EVA® improvement also is the focus of our incentive compensation plan. With the completion of the 2003 plan and our decision to retain the Power business, we have turned our attention to the creation of superior, sustainable growth through Economic Value Added» (EVA)-based disciplined investments in natural gas businesses. Our strategy going forward is to sustain the strategic and financial discipline followed during the implementation of the 2003 business strategy.
