Key Points
The disconnect between what we see everyday versus what markets perceive stems from the fact that investors have convinced themselves that in a few years, these stocks and sectors will cease to exist..
At least a few investors seem to have done a similar analysis because shares of a newspaper company, an engine oil manufacturer and a maker of thermal power generation equipment have more than doubled in the past year..
As new challengers start reaching a larger scale, their growth inevitably slows down, which means that pace-of-decline assumptions in our worst-case DCF analysis start changing in favour of challenged companies..
Importantly, most challenged companies start conserving cash as capital spends are limited. Faced with the very real prospect of declining demand, instead of embarking on new projects, they opt to return cash to shareholders by way of dividends and share buybacks..
While the zero-terminal-value DCF approach approximates the worst-case situation, upside scenarios can present themselves if demand revives for products and services produced by challenged sectors..
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