Franchise Valuation under Q-Type Competition

Martin L. Leibowitz

Financial Analysts Journal, 1998, vol. 54, issue 6, 62-74

Abstract: When considering a company's prospects, analysts often segment the earnings progression, either formally or intuitively, into a series of growth phases followed by a relatively stable terminal phase. This study focuses on the role of competition in the terminal phase. In the simplified two-phase model of a single-product company, the first-phase earnings growth drives the company's overall return on equity toward the (generally higher) incremental ROE on new investments. The company then enters the terminal phase with a high ROE that attracts the attention of a potential competitor that can replicate the company's production/distribution capacity at some multiple Q of the original capital cost. This “ Q-type competition” can lead to margin erosion and a reduction in earnings as the ROE slides to more competitive levels. The implication is that, unless a company has either the diversity of product/service cycles or other special ways to deflect competitive pressures, the analyst should address the potential impact of Q-type competition on the sustainability of the company's franchise and the company's valuation.

Date: 1998
References: Add references at CitEc
Citations:

Downloads: (external link)
http://hdl.handle.net/10.2469/faj.v54.n6.2226 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:ufajxx:v:54:y:1998:i:6:p:62-74

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/ufaj20

DOI: 10.2469/faj.v54.n6.2226

Access Statistics for this article

Financial Analysts Journal is currently edited by Maryann Dupes

More articles in Financial Analysts Journal from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().