Warren Buffett's partner, Charlie Munger, once said, "I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther."
For corporate boards, using bad incentives for management's pay can be disastrous (think Lehman Brothers). Incentives based on singular metrics such as revenue growth, EBITDA, ROE, or earning per share are easily manipulated and gamed. Fortunately, there is a better way: EVA Momentum.
Created by Bennett Stewart of EVA Dimensions, co-creator of EVA (Economic Value Added), Stewart says EVA Momentum is "the only percent metric where more is always better than less. It always increases when managers do things that make economic sense."
For explanations of either term, click here for EVA and here for EVA Momentum.
So what does this mean for investors? The best companies are those creating value above their cost of capital, as reflected by a positive EVA momentum. The higher the EVA momentum, the stronger management's value creation.
Let's look at Las Vegas Sands' and three of its casino industry peers to see how effectively they create value. Here are the trailing four quarters EVA momentum figures for each company over the past three years and ranking by percentile vs. other members of the Russell 3000 for the past 12 months EVA Momentum.
|
Related Companies |
2008 |
2009 |
2010 |
Russell 3000 Percentile |
|---|---|---|---|---|
|
Las Vegas Sands |
(14.9%) | (8.9%) | 4.0% | 75th |
|
Boyd Gaming |
(3.5%) | (0.6%) | (1.1%) | 24th |
|
MGM Resorts International |
(4.6%) | (6.0%) | (2.9%) | 21st |
|
Wynn Resorts |
2.4% | (8.1%) | 1.6% | 56th |
Source: EVA Advisors, a division of EVA Dimensions.
Of the four casino companies, Las Vegas Sands and Wynn Resorts are the only two to have created value for shareholders this past year. Las Vegas Sands' 4% EVA Momentum places it in the 75th percentile of all Russell 3000 companies. Over three years, though, none of these casino companies has created value.
Businesses with high EVA momentum are effectively creating value. With such a new metric, it will be interesting to see how useful it is to companies and investors. If it lives up to its promise, it will be an essential tool in investors' tool belts.
One more tool
Most investors don't keep tabs on their companies' cash flow, and that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home run stocks that provide the market's best returns.
We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.
- Add Las Vegas Sands to My Watchlist.
- Add Boyd Gaming to My Watchlist.
- Add MGM to My Watchlist.
- Add Wynn Resorts to My Watchlist.
Dan Dzombak recommends you read The Best Investment Advice You Will Ever Get if You Have Under $100k, he does not own shares in any of the companies mentioned. His musings and articles he finds interesting can be found on his Twitter: @DanDzombak.
