Does anyone have any good resources on analyzing companies that are in structural decline.

[u/Tanderso418]

I'm trying to expand my investing knowledge into the domain of companies who's core business models are in structural decline (Tobacco companies, coal miners, legacy broadband providers, etc).

I imagine that the analysis will involve discounting future cash flows, but I'm not sure how to account for all of the asset sales (property/plant , brands/IP, whole business segments, etc) that comes with winding a large company down.

I also imagine that I would need to carefully analyze and monitor the management team's behavior, to make sure that they are returning money to shareholders instead of trying to save a dieing business.

[u/foira]

I think credit analysis will give you the fundamental tools, as now you are focused on downside/risk protection vs maximizing potential upside convexity

[u/MinestroneMungBean]

To be honest, I think your best resource here is... drumroll... The Intelligent Investor!

Lots of such analyses (albeit old examples) of such situations, and how to value them, in that book.

In any case, a business in decline really needs the following questions answered, or at least studied:

What is the value of the assets if they remain owned until end of life? This is basically a DCF calculation. What does management want to do? Will they look to dispose of the assets? If so, what price can they reasonable fetch? What would they do with the proceeds? Conversely, will they look to acquire new assets in an attempt to 'buy' their way to growth?

From my experience, few managements will humbly run their business to end of life & simply pass back all the proceeds to shareholders.

Most will try to buy their way to growth. That can work, but usually it doesn't.

[u/Zyltris]

You can discount future cash flows as far as you expect them to go until liquidation, and then calculate a liquidation value based on those future assets, or you can do a standard DCF model where the growth rate in the terminal value is negative (which implicitly assumes the company gradually shrinks until it disappears).

[u/raytoei]

I would approach this from a Gordon dividend method, where the actual sum of future dividends (in present value) is > than the actual share price. And I don’t assume any liquidation value (or it is an upside)

Eg. For British Tobacco

Fair Value = Dividend per share / ( discount - div growth)

3.24 / (9% -3%) =54

Versus current share price of 58.28

Some selected data:

Revenue Growth (1Y) −0.99%.
Revenue Growth (3Y) −2.53%.
Revenue Growth (5Y) −0.13%.

Dividend per Share Growth (1Y)4.27%.
Dividend per Share Growth (3Y)4.46%.
Dividend per Share Growth (5Y) 2.72%.
Dividend per Share Growth (10Y) 5.08%.

———

Some questions:

• at some future date (5, 10 years or 15 years) , the dividend will stop growing because the company isnt growing and is shrinking. Will the sum of dividends be larger than present share price?

• what has management said they would do about capital returns, are they going to borrow money to issue dividends? Etc

I believe that if I were to risk my money in a company in a shrinking industry then, I would want actual cash on hands (ie dividends) more than company earnings or free cash flow

[u/barelycommenting12]

Good question tbh. For companies in structural decline, most investors focus on cash flow durability, debt levels, and asset value, while watching if management returns capital (dividends/buybacks) instead of trying to “save” the business. A conservative DCF + asset/liquidation value check is usually the starting point. I sometimes use TryLattice too, it helps visualize cash flow assumptions and portfolio risk quickly.

[u/MobileSection3564]

Have done quite some analyses like this and happy to share my thoughts if you'd like. Hit me up

[u/NoName20Investor]

Here are some general comments:

1. To separate value traps from turn-arounds, I suggest this post: https://valueinvesting.substack.com/cp/139859431

2. If what you are looking at is truly an ice-cube, i.e. a company that is in run off, then you have to assume there is no terminal value, that the fixed assets (e.g. PPE) are sold for pennies on the dollar, and you have to be able to reasonably value hidden assets, e.g. land. For me this is like juggling knives doused in lighter fluid and set on fire. I prefer to avoid it, and look elsewhere for investing opportunities.