1. COMPARATIVE PREDICTIVE CAPABILITY OF TRADITIONAL PORTFOLIO METRICS
By Rawley Thomas, President
LifeCycle Returns, Inc.
March 21, 2004

2. PORTFOLIO METRICS COMPARED TO LCRT FOR PREDICTIVE CAPABILITY
Multiples
P/E Continuing Operations*
E/P Yield Continuing Operations*
Price/Cash Flow
Free Cash Flow Multiple
Enterprise/EBITDA
Enterprise/EBIT (1-Tax Rate)
Enterprise/Capital Book
Price/Equity Book
Price/Sales
Growth Rates
EPS Basic*
Cash Flow Per Share
Return Measures
ROE
ROE before Non-Recurring
ROCE
ROA
Cash Economic Return
Size
Sales
Equity Market CAP
Gross Investment
Risk Measures
Beta
Debt/Capital at Market
Debt/Capital at Book
Foreign Sales % of Sales > 0
Dividend
Annualized Dividend Yield
Payout
* Multiple variants of these measures produced very similar results.
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

3. Predictive Capability of Traditional Portfolio Metrics
LCRT’S RESEARCH METHODOLOGY CONTRASTS SHARPLY WITH THE TRADITIONAL VALUATION APPROACH
Traditional Approach
Forecasts 3-10 Years of Cash Flows specific for each firm
Applies Perpetuity or Multiple for Terminal Value
Discounts to Present (plan valuation)
Implicitly assumes the structure and parameters of the terminal valuation are robust and accurate or “plugs” the parameters to explain current price
LCRT Methodology
Employs only actual data to to empirically test robustness and accuracy of valuation models, methodologies, and parameters
Enables testing hypotheses in an independent way which does not contain a look-ahead bias by knowing current price
Extends the validated models to use as terminal values in traditional plan valuations using security analyst estimates or other forecasts
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

4. Predictive Capability of Traditional Portfolio Metrics
~ 3,000 INDUSTRIAL AND MANUFACTURING COMPANIES WITH MEDIAN TOTAL SHAREHOLDER RETURN OF -7.84% DIVIDED INTO “WINNERS” AND “LOSERS” BASED ON INTRINSIC VALUE SCREENS AT FISCAL YEAR + 3 MONTHS SPLITTING DISTRIBUTION APPROXIMATELY IN HALF
Total Universe
Median = -7.84%
N = 17,697 Company-Years
Panel Data
“Winners” are under-valued at Fiscal Year + 3 Months and “Losers” are over-valued at Fiscal Year + 3 Months.
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

5. LCRT “WINNERS” OUT-PERFORM “LOSERS” BY 12.3% (= -2.04 –(-14.38))
Median = -2.04%
N = 8,628 Company-Years
Panel Data
“Losers”
Median = %
N = 8,771 Company-Years
Panel Data
On average, the under-valued companies under-performed the S&P, but did better than the 7.8% decline in the universe.
On average, the over-valued companies under-performed both the S&P, and the 7.8% decline in the universe.
“Winners” are under-valued at Fiscal Year + 3 Months and “Losers” are over-valued at Fiscal Year + 3 Months.
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

6. Predictive Capability of Traditional Portfolio Metrics
EARNING PRICE YIELD (E/P*) AND LCRT PERFORM BEST TO SEPARATE “WINNERS” AND “LOSERS”; TRADITIONAL P/E* IS POOR
* Multiple variants of E/P and P/E produced very similar results.
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

7. Predictive Capability of Traditional Portfolio Metrics
MOST TRADITIONAL PORTFOLIO METRICS DO NOT SEPARATE “WINNERS” FROM “LOSERS” PARTICULARLY WELL
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

8. EPS AND CASH FLOW PER SHARE GROWTH PICK “WINNERS” BUT NOT “LOSERS”
* Multiple variants of EPS growth produced very similar results.
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

9. SIZE MEASURES ARE NOT GOOD PREDICTORS
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

10. Predictive Capability of Traditional Portfolio Metrics
WITH AGGREGATE POSITIVE SPREADS OF ECONOMIC RETURNS OVER THE COST OF CAPITAL, ALL MEASURES OF FIRM RATES OF RETURN ON INVESTMENT ARE PREDICTIVE
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

11. Predictive Capability of Traditional Portfolio Metrics
TRADITIONAL RISK MEASURES FOLLOW COUNTER-INTUITIVE PREDICTIVE CAPABILITY
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

12. Predictive Capability of Traditional Portfolio Metrics
ROTATION TOWARD DIVIDEND PAYING FIRMS HAVE REWARDED INVESTORS, BUT LITTLE SPREAD EXISTS BETWEEN HIGH AND LOW YIELDS OR PAYOUTS
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

13. Predictive Capability of Traditional Portfolio Metrics
EARNING PRICE YIELD (E/P*) AND LCRT PERFORM BEST TO SEPARATE “WINNERS” AND “LOSERS”; TRADITIONAL P/E* IS POOR
* Multiple variants of E/P and P/E produced very similar results.
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

14. Predictive Capability of Traditional Portfolio Metrics
MOST TRADITIONAL PORTFOLIO METRICS DO NOT SEPARATE “WINNERS” FROM “LOSERS” PARTICULARLY WELL
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

15. Predictive Capability of Traditional Portfolio Metrics
NEITHER EPS OR CASH FLOW PER SHARE GROWTH RATES SEPARATE “WINNERS” FROM “LOSERS” AS WELL AS LCRT
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

16. SIZE MEASURES ARE NOT GOOD PREDICTORS
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

17. Predictive Capability of Traditional Portfolio Metrics
WITH AGGREGATE POSITIVE SPREADS OF ECONOMIC RETURNS OVER THE COST OF CAPITAL, ALL MEASURES OF FIRM RATES OF RETURN ON INVESTMENT ARE PREDICTIVE
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

18. Predictive Capability of Traditional Portfolio Metrics
TRADITIONAL RISK MEASURES FOLLOW COUNTER-INTUITIVE PREDICTIVE CAPABILITY
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

19. Predictive Capability of Traditional Portfolio Metrics
ROTATION TOWARD DIVIDEND PAYING FIRMS HAVE REWARDED INVESTORS, BUT LITTLE SPREAD EXISTS BETWEEN HIGH AND LOW YIELDS OR PAYOUTS
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from , 17,697 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

20. Predictive Capability of Traditional Portfolio Metrics
COMBINING EARNING PRICE (E/P) AND LCRT SCREENS SEPARATE “WINNERS” FROM “LOSERS” BY 17.1% = (-.06-(-17.17)
E/P “Winners” & LCRT “Winners”
Median = -0.06%
Average = 8.16%
N = 6,898 Company-Years
E/P “Losers” & LCRT “Winners”
Median = -6.41%
Average = 8.20%
N = 1,807 Company-Years
E/P “Losers” & LCRT “Losers”
Median = %
Average = -0.75%
N = 6,872 Company-Years
E/P “Winners” & LCRT “Losers”
Median = -6.22%
Average = 1.40%
N = 1,870 Company-Years
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million, Panel Data from
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

21. Predictive Capability of Traditional Portfolio Metrics
COMBINING ROA AND LCRT SCREENS SEPARATE “WINNERS” FROM “LOSERS” BY 20.4% = (1.83-(-18.60)
ROA “Winners” & LCRT “Winners”
Median = 1.83%
Average = 9.49%
N = 5,837 Company-Years
ROA “Losers” & LCRT “Winners”
Median = -8.83%
Average = 5.38%
N = 2,872 Company-Years
ROA “Losers” & LCRT “Losers”
Median = %
Average = 0.80%
N = Company-Years
ROA “Winners” & LCRT “Losers”
Median = -8.12%
Average = -0.19%
N = Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

22. Predictive Capability of Traditional Portfolio Metrics
COMBINING CER AND LCRT SCREENS SEPARATE “WINNERS” FROM “LOSERS” BY 20.4% = (2.26-(-18.01)
CER “Winners” & LCRT “Winners”
Median = 2.26%
Average = 11.05%
N = 5,558 Company-Years
CER “Losers” & LCRT “Winners”
Median = -7.85%
Average = 2.99%
N = 3,150 Company-Years
CER “Winners” & LCRT “Losers”
Median = -8.58%
Average = -0.13%
N = 3,168 Company-Years
CER “Losers” & LCRT “Losers”
Median = %
Average = 0.08%
N = 5,595 Company-Years
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt

23. Predictive Capability of Traditional Portfolio Metrics
MOST TRADITIONAL PORTFOLIO METRICS ARE 100% ROBUST, BUT A FEW NOTABLE EXCEPTIONS EXIST, LIKE P/E AND FREE CASH FLOW MULTIPLES, BECAUSE THE METRIC LACKS MEANING WITH A NEGATIVE DENOMINATOR
Equity Market CAP
Robustness: % of 20,920 Company-Years with Equity Market Value
Gross Investment
Debt/Total Capital at Book
Cash Economic Return
Foreign Sales % of Sales > 0
Sales
ROA
ROE
ROE before Non-Recurring
ROCE
E/P Continuing Operations
Debt/Total Capital at Market
Annualized Dividend Yield
LCRT
Price/Sales
Enterprise/Capital Book
Price/Equity Book
Enterprise / EBITDA
Cash Flow Per Share Growth
Dividend Payout
Price/Cash Flow
Beta – Fiscal Year with Dividends
Enterprise/EBIT (1-Tax Rate)
EPS Growth Basic
P/E Diluted Continuing Operations
Free Cash Flow Multiple
Sources:
Financial Statements and Price Data – Simplystocks
Calculations - LCRT’s Platform
Constant Dollar Gross Investment > $100 Million
Predictive Capability of Traditional Portfolio Metrics
March 23, 2004 Rt