STOCKPOINTING WITH EVA!

Transcription

1 STOCKPOINTING WITH EVA! EVA is a registered Trademark of Stern & Stewart & Co. NY, NY Stockpointer, Inc. Revised June 2007 \2

2 STOCKPOINTING WITH EVA! INTRODUCTION Economic Value Added (EVA) is a measure of corporate financial performance that Fortune magazine has called today s hottest financial idea and getting hotter. Hundreds of companies have implemented EVA performance enhancing programs and more continue to do so every day. Until now, the focus of economic evaluation has been directed toward the internal financial management of a firm. StockPointer brings this same technology to investors and analysts. The EVA framework allows investors to more systematically quantify the economics of a business, bringing new discipline to support their judgment. StockPointer s research database supports the use of EVA in securities analysis for equity research analysts and portfolio managers. This primer illustrates how EVA can be used to improve fundamental security analysis. IT S ABOUT ECONOMICS The blindingly simple insight that business is primarily about economics, not about accounting, is one of the important achievements in modern business thought - Bob Shapiro, former Chairman and CEO, Monsanto Company. Two decades of academic research consistently supported the main thesis of economic evaluation; namely, that stock prices are primarily influenced by the underlying economics of a firm. Investors respond to economic realities and they aren t fooled by accounting conventions, even when purposefully crafted to inflate earnings. Through the EVA Executive Summary Report (one of the primary functions of StockPointer), a company s financial performance is shown clearly with full account of the underlying economics of the business. Many corporations now use economic value added (EVA) for managers, or in some cases all employees, to promote, measure and reward the creation of shareholder wealth. EVA, however, can also help investors measure, observe, and understand the underlying value and value drivers of a business, leading to better and more informed investment decisions. StockPointer s EVA calculations are perfectly consistent with modern corporate financial theories. In one measure, our metric properly accounts for all the complex trade-offs between the income statement and balance sheet, which are absent with traditional accounting based performance measures. Using an EVA based framework simultaneously focuses on both profit and capital and captures the complete performance attributes of a business. KEEPING SCORE THE RIGHT WAY Why use EVA over the traditional accounting measures of EPS or ROI? Of course, accounting measures often reflect changes in the value of a business. As with all rules of thumb, accounting measures can work, particularly if applied by a skilled analyst who can feel when adjustments to the standard should be made. Investors have relied on accounting measures for countless years. However, each of these measures has a specific shortcoming that can be very costly in too many situations. When EPS continues to rise despite a fundamental negative shift in the economic value of a firm, the investment costs can be great. Or when a measurement shortcoming leads to excluding profitable investments, significant opportunities can be lost. Investors should use the best information and technology available to make their investment choices. How is a company doing? What is its financial performance? The EVA framework is used to measure the economic performance consistently and accurately. The EVA Executive Summary report gives you a wealth of data in a clearly presented format that addresses fundamental economic assessment. You can see both quantitatively and visually the information you need for better insights and decisions. 2

3 Extensive Data, Clearly Presented The StockPointer EVA framework is more accurate in accessing company financial performance. So, how can you tell whether a company is performing well? This guide will show you how to read the EVA Executive Summary report and maximize its utility. WHAT IS ECONOMIC VALUE ADDED (EVA)? Quite simply, Economic Value Added is a measure of the economic profit produced by a company as a result of its operations. A key difference between economic profit and accounting profit is that a charge is calculated for the use of the equity capital. EVA analysis looks at all capital, both debt and equity while standard accounting practices leave equity outside all calculations. The Capital Charge is simply the Cost of Capital (as a %) multiplied by the Capital Invested. In this way, EVA accounts for the use of all capital in assessing performance. The calculation of EVA is: EVA = Net Operating Profit After Tax (NOPAT) - (Cost of Capital x Capital) Let s run an example: if NOPAT = $150, Capital = $1,000 and the Cost of Capital is 10%, the following equation defines the calculation of EVA: EVA = $150 - (10% x $1,000) = $50 EVA can be thought of as what s left (the residual) after the suppliers have been paid, the employees have received their salaries, the administrative expenses are covered and the capital providers get what was agreed (in the case of lenders) or what they expect (in the case of stockholders). This concept, in finance, is called residual income. Investors may or may not get what they expect. That s what makes EVA particularly useful to investors: at a glance, someone can see a company s performance. A positive EVA means that the company has produced returns in excess of investor expectations and a negative EVA means that it did not. Is the EVA positive or negative? Is the EVA increasing or declining? See this important information at a glance. ALTERNATIVE DEFINITION OF EVA A mathematically equivalent alternative definition for EVA is the difference between the rate of Return on Capital (ROC) and the Cost of Capital (COC), multiplied by the Invested Capital. This Performance Spread (Return on Capital - Cost of Capital) gives the relative measure of a company s financial performance compared with investors expectations. The EVA is obtained by multiplying the Performance Spread by the Invested Capital. EVA = (Rate of Return - Cost of Capital) x Capital EVA = (15% - 10%) x $1,000 = $50 Comparing the Return on Capital and the Cost of Capital achieves a useful performance measure. Dividing the Return on Capital by the Cost of Capital produces the Performance Index, which is found in the EVA Executive Summary Economic Performance section. Values greater than 1.0 indicate that the company s results exceed the expected return. Naturally, the above construction is a simplified example. We cover specifics in more details in the following sections. 3

4 WHY SECURITY ANALYSTS USE EVA? EVA analysis is at the heart of understanding how companies create shareholder wealth. Most importantly, it helps investors measure and understand those factors that create or destroy value - Steven Einhorn, Director of Global Investment Research, Goldman, Sachs & Co. With EVA being used both qualitatively as a signaling mechanism to better understand management actions, decisions and strategy, as well as quantitatively to improve security analysis itself, EVA is now recognized as an important tool by the investment community. It is valuable in this regard for these reasons: EVA is a better measure of period performance because it combines the income, balance sheet, and cash flow statements into one measure and carries an explicit charge for the weighted average cost of all sources of capital. Thus, EVA better quantifies operating performance often before or more clearly than traditional measures; EVA systematically levels the playing field for comparisons amongst companies or industries on a more meaningful basis; EVA can provide a better gauge of company or sector security price levels by quantifying their implied expectations. THE LIMITS OF ACCOUNTING CONVENTIONS In one of the first books on economic evaluation, Professor Al Rappaport identified the inherent shortcomings of the accounting model of a firm. In his book Creating Shareholder Value, he identified key reasons why accounting earnings can fail to measure changes in the economic value of a business. A summary of the limitations of conventional measures and the EVA remedy is presented in the table below. Shortcoming Accounting Model EVA Remedy Simply increasing investment, regardless of the returns on incremental investment can increase earnings since equity capital has no cost. Investment Requirements are Excluded Alternative Accounting Conventions Lead to Different Results Business Risk is Excluded Financial Policy isn t Considered Companies often make accounting choices to craft a desired earnings result. Businesses have inherent risk profiles because of the nature of their operations and industry. No consideration of relative risk is included. Comparing companies with high debt and no/low debt structures ignores the additional financial risk and changes to the cost of capital. All capital has a cost that is charged to earnings to develop a reliable economic profit measure. In the development of the EVA model, NOPAT and Capital calculations, a number of adjustments are included to create comparable, reliable and standard measures. Since equity capital has a cost in the EVA model, a company s individual risk profile is considered when calculating the economic metric. EVA performance measures are adjusted to assume no debt and only operating elements of the financial statements. Debt structure is considered when calculating the cost of capital. As we explore the EVA Executive Summary, the strength of the economic value analytical technique will become more and more apparent. 4

5 INNOVATIVE DATA ANALYSIS RUNNING 12 MONTH CALCULATIONS StockPointer performs its calculations from publicly available sources of data on a quarterly basis. We use a proprietary calculation that combines annual and quarterly reports to produce a running 12-month evaluation period. All data represents the most recent available with comparable periods constructed for five years of history. This approach permits someone to have the most recent data available and to see trends as soon as possible and significantly sooner than with any other service. FIVE KEY EVA CALCULATIONS Five calculations form the baseline values for StockPointer EVA analysis and the calculation of EVA itself. The calculations were designed to be straightforward and balance the need for precision with the practical considerations of data availability and ease of understanding. The baseline calculations are NOPAT Adjustments, EVA Tax, NOPAT, Invested Capital and Cost of Capital. EVA analysis restates accounting results with several goals: Standardize the treatment of accounting options to eliminate specific shortcomings; Produce a statement that can be thought of as a presentation of the company s performance as if the company was financed entirely with equity; this means that interest expense is not deducted from earnings and that taxes are restated; Capture the impact of any financial policy (debt financing and interest expense) in the Cost of Capital calculation. The resulting figures show a company s performance in a standardized and directly comparable way. A brief description of these important calculations describes the analytical approach to the numbers. Baseline Value NOPAT Adjustments EVA Tax NOPAT Invested Capital Cost of Capital Description This value is the sum of adjustments to Operating Profit that converts accounting data into economic reality. They restate and standardize the presentation of financial data to put different companies on equal footings. The purpose is to make EVA a better measure of true economic profit and to strengthen the connection between EVA and MVA. A complete list of these adjustments is found in Appendix A. This calculation is the tax a company would have paid assuming only equity financing was used and no interest expense deductions were taken. The Net Operating Profit After Tax is equal to the reported Operating Profit plus the NOPAT Adjustments and less the EVA Tax. This restated value presents the true economic earnings of the company undistorted by financing differences and disparate accounting treatments amongst companies. A calculation of all moneys invested in a company at any point. The balance sheet data is adjusted as described in Appendix A. This value is the weighted average Cost of Capital combining the costs of equity (as estimated using the CAPM-Capital Asset Pricing Model approach), preferred stock and debt. Market value weights for equity and book value weights for preferred stock and debt are used to develop this number. Now let s look at the EVA Executive Summary report. 5

6 HOW TO USE EVA FOR STOCKPOINTING - READING THE EVA EXECUTIVE SUMMARY The EVA Executive Summary report is divided into five sections: 1) General Information and Current Valuation; 2) Intrinsic Value 3) Market Performance; 4) Economic Performance; 5) Accounting Performance. With a sample report in hand, let s review the content of each section: Section 1 - General Information and Current Valuation This section contains general information about the company and the baseline calculation for Intrinsic Value (IV), Market Value (MV), Invested Capital, and as of the date of production of the EVA Executive Summary report. The section further splits the Market Value calculation into Current Operations Value (COV) and. More details about these concepts will be given in the following sections. The user also has a direct access to the company s WEB site from this section. Section 2 - Intrinsic Value All the following sections present five years of historical data using the StockPointer s proprietary running either 12-month or 36-month evaluation periods. The Intrinsic Value section presents the five-year historical data of all basic numbers related to EVA and Intrinsic Value (IV). The left-hand side of the section presents the numbers with a 12-month trailing period (Considering 4 Quarters) while the right-hand side presents the same calculations but using a 36-month trailing period (Average of the NOPAT/year of the three last years). This section first starts with a presentation of two major elements of EVA: Return on Capital (ROC) and Cost of Capital (COC) and from the difference of these two elements can be derived a first valuation of EVA as a percentage of the invested Capital, called Performance Spread. Then the calculation of the Intrinsic Value (per share) of the company s equity is clearly presented as being: Intrinsic Value of Equity = Net Present Value (NPV) of all future EVA + Invested Capital Debt = (Last period EVA/NPV factor) + Invested Capital Debt = (Last period EVA/Cost of Capital) + Invested Capital Debt When the price of a share is compared to its Intrinsic Value, a fair estimate of the under or over-evaluation of the stock is obtained. This ratio is called the /IV ratio. Section 3 - Market Performance This section shows the five years of historical calculations for Market Value, Current Operations Value (COV) and. The Market Value (of Capital) is obtained by multiplying the period-end share price by the number of outstanding shares and adding it to the Debt Market Value can then be divided into its basic components: Market Value = Current Operations Value + Future Growth Value The Current Operations Value (COV) is simply the net present value (NPV) of all future NOPAT without assuming any growth. This value is obtained by dividing the last period NOPAT by the Cost of Capital. As an example, if a company s NOPAT is $500 and it s Cost of Capital is 15%, then the COV = $500 /.15 = $3,333. Knowing both the MV and the COV, the calculation of can be derived by subtracting the Current Operations Value from the Market Value. 6

7 The higher the FGV relative to Total Market Value is, the greater the expected (from the market) growth in the share price is and the higher is the premium to acquire that stock. The FGV gives the most accurate representation of what the market expects from a company and is an excellent measure of the stock price volatility if those expectations are not met. Lower relative FGV indicates the market assigns only a limited growth potential to the company and therefore a lower premium will be imbedded in the Market Value. With the graph on the right-hand side of this section, you can visualize the relative contribution of COV and FGV to Total Market Value, presented on a quarterly basis. A negative FGV is possible if the COV is greater than Total Market Value. In this case, the stock is considered to be sold at a discount. Section 4 - Economic Performance This section is depicting a more detailed analysis of the EVA in dollars which is basically equal to the NOPAT (Net Operating Profit After Tax) minus the Capital Charge. Starting from the Operating Profit, the NOPAT (Net Operating Profit After Tax) is first calculated by adding the appropriate Adjustments (see Appendix A for details) and subtracting the Income Tax. This becomes the economic earnings from which the Capital Charge is deducted to obtain the EVA The Capital Charge represents the total fee required by the shareholders and the creditors for the use of all capital. It is a blended rate for the total use of all debts plus preferred and equity capital. With this approach, companies that are more capital efficient are charged a lower absolute fee while companies that are not managing properly their capital pay a higher fee. The higher the Capital Charge is, the lower the EVA will be. Companies enjoy a performance advantage when they use capital sparingly and wisely. Often the Change in EVA value is more important than the absolute value of EVA. This value indicates the magnitude and direction of change in economic performance. It tells us whether the economic performance of the company is improving or deteriorating. Four commonly calculated ratios are provided in this section: 1) Return on Capital, defined as NOPAT / Capital; 2) Performance Index: the ratio of Return of Capital to Cost of Capital; 3) EVA / Capital, an excess return measure and 4) EVA / Share. With the graph in this section, you can see how well EVA and Net Operating Profit track the share price. Section 5 - Accounting Performance This section presents the most commonly reported accounting performance data. The graph in this section shows how well Earnings Per Share track the share price. This section provides some important information about the Free CashFlow generated by the Company as well as the Dividends that are paid. INTERPRETING THE EVA NUMBERS Despite the analyst's natural tendency towards year-to-year percentage EVA growth, this yardstick is to be avoided because of the bias introduced by the baseline. Percentage growth actually demands most from those doing best, and least with those who might have the most opportunity for improvement. A more sensible, convenient gauge of EVA growth is to express changes in EVA as a percentage of capital. Any single period measure can be misleading. Is EVA declining because of deteriorating operations, or from major investments that dilute near-term EVA but ultimately pay off in the long run? Most positive NPV acquisitions are actually EVA-dilutive in the near term, but EVA-accretive in the long term. Positive EVA does not in itself make a stock a good pick. In fact, some negative EVA companies can be better picks. A company's level of EVA has little value for the security selection decision because stock price is not yet factored in; security selection under EVA is not tantamount to, "buy positive EVA and short 7

8 negative EVA stocks". It is not the level of EVA that drives shareholder returns, but the EVA growth vis-àvis the growth implied in a stock price. A stock is attractive when the analyst judges market expectations in some way unreasonable, either too high or too low. By focusing on the expected future growth of EVA implied in any stock price, the analyst can eliminate the crucial role that forecast horizons and competitive advantage periods play in determining a stock's attractiveness. It is not magic, but EVA can shed new insights into market expectations, prospects and pricing. An analyst can use EVA to improve fundamental security analysis with an improved measure of period performance and a better gauge of price and market expectations. Since current value is dependent on market expectations, market values are sensitive to changes in current EVA as well as expected EVA improvement. Most stocks trade with a very significant amount of value dependent on expectations of growth. Assessing levels and changes in future growth values as a percentage of total market value sheds insight into pricing, particularly when assessing further future upside opportunity. MORE INFORMATION ON THE ECONOMIC VALUE APPROACH Three books represent the best-collected presentation on the economic value framework. Complete descriptions of the theory and implementation can be found in each. The books give the reader fuller, more detailed descriptions of the concepts and ideas that StockPointer has implemented in the EVA Executive Summary research reports and database. The books are: - Creating Shareholder Value, The New Standard for Business Performance, by Alfred Rappaport - The Quest for Value, A Guide for Senior Manager, by G. Bennett Stewart, III, Stern Stewart and Co. - Valuation, Measuring and Managing the Value of Companies, by Tom Copeland, Tim Koller, and Jack Murrin, McKinsey & Company, Inc. 8

9 APPENDIX - A EVA Adjustments to NOPAT Bad Debt Reserve To be conservative, accountants subtract a provision for anticipated bad debts and establish a bad debt reserve contra to the asset account. One result is that business managers are tempted to overstate the provision in good years and to raid the reserve in down years to prop up earnings. To avoid this distortion in the economic framework, no bad debt losses are recognized until the bad debt is formally written off. Capitalized Marketing & Advertising Accountants expense the cost of launching and supporting new products and brands. In economics, such outlays are considered a vital investment that can generate profits for years to come. Accordingly, under EVA marketing and the after-tax portion of advertising outlays are added to capital, and are amortized as a charge to earnings over a three-year period. Capitalized Research & Development Similar to Marketing and Advertising, accountants expense R&D to be conservative. But if a company wisely increases its spending on promising research, its reported earnings may tumble even though the firm is simply adding to the capital stock of its business. Not all research pays off, of course, but in the new economy the most important investments a company can make are in learning and innovation, and yet accountants, following old economy notions, incorrectly treat those expenditures as expenses. If an objective of security research is to gauge the effectiveness of investments in learning and innovation, the full cost of research should be capitalized so that the profits earned by the successful efforts can reveal the return on the full investment in innovation. Accrued Taxes The amount of accrued taxes due in the current period. Accrued taxes in the EVA framework exclude taxes arising from non-operating items (e.g. unusual income). However, tax savings due to the tax shield of debt are added to accrued taxes: since the tax implication of debt has already been taken into account in charging an after-tax cost to the debt-financed portion of capital. Amortization of Goodwill The accounting charge to earnings that stems from writing down the investment in the acquisition premiums paid over book value. In today s economy such acquisition premiums are most often associated with permanent assets brands, infrastructure, capabilities, culture, management style and quality that do not depreciate when they are properly managed. As a result, the return from an acquisition is typically measured more accurately without amortizing goodwill. Consequently, for EVA measurement purposes, the amortization of goodwill is ignored, and the cumulative amortization of goodwill is added back to capital, rendering a financial picture as if the goodwill was recorded but never amortized. Adjustments for Stock Options - Current accounting rules make it possible for companies to set up incentive stock option plans in a way which will not give rise to recorded option expense charged to revenues. Option expenses, however, represent a legitimate operating cost and, as such, should be included in the calculation of NOPAT. Cumulative Translation Gain (Loss) The cumulative FASB 52 gain or loss from the translation of foreign assets and liabilities into U.S. dollars. The CTA has no income effect for the period. It is disclosed and accumulated in a separate component of consolidated equity until the sale of the foreign asset takes place. When available, CTA is added back to capital. Cumulative Unusual Loss After-Tax The cumulative amount of any losses, less gains, after-tax, arising from non-recurring property disposals, restructurings, or other unusual events. In the economic framework, these charges are added back to earnings so that investors can focus on the underlying, normalized earnings power of the business. To preserve the integrity of double entry bookkeeping, such charges are also added back to capital on an after-tax basis. In-Process Research & Development The alleged value of research that is still under development at the time a company is sold, and which the buyer immediately expenses. Expensing the cost of acquired In- Process R&D enables a company to sidestep recognizing part of the purchase price in the form of goodwill it paid to consummate an acquisition. This leads to an overstatement of the buyer s return on capital and its 9

10 EVA. To eliminate this distortion, the cost of in-process purchased R&D is added back to the capital of the buyer as goodwill and the capitalized expense is added back to NOPAT. LIFO Reserve The difference between the LIFO value of the inventory and its FIFO value. If a company switches from FIFO to LIFO in times of rising prices, it will reduce its reported earnings, but also pay lower taxes on lower earnings, and end up with more cash in the bank. Academic studies confirm that stock prices respond positively to the stronger cash flow of LIFO than to the higher book earnings of FIFO. To recognize the benefit that using LIFO provides, and to put LIFO and FIFO companies on a comparable footing for analysis purposes, under EVA the LIFO reserve is added to book inventory and the year to year change in the LIFO reserve is added to NOPAT. Marketable Securities The amount of the firm s portfolio of stocks and bonds that is readily liquid. Since marketable securities are not usually an integral and necessary part of the working capital necessary for business operations, the investment in marketable securities is excluded from capital and the earning derived form marketable securities is left out of NOPAT. Operating Gain/ (Loss) from Discontinued Operations The gain/loss due to the disposition of assets. In the economic framework, a company s disposal should be viewed as a return of shareholder capital. The income associated with discontinued operations is treated as operating income, and the gain/loss on sale is capitalized. Present Value of Non-Capitalized Leases The present value of all long-term, non-cancelable operating lease obligations. From a practical point of view, operating leases are usually associated with assets that will continue to be needed to run the business. Therefore, the present value of such leases obligations is added to debt capital to approximate the investment that would have occurred had the asset been purchased with borrowed funds. The present value of non-capitalized leases are estimated by discounting the future minimum lease payments detailed in the footnotes to the firm's financial statements. The discount rate used is the estimated cost of debt for the firm. The implied interest expense as calculated on the basis of this discount rate will be excluded from NOPAT as a financing charge accounted for in the capital charge. 10

11 APPENDIX - B Case Study Royal Bank of Canada (RY.) versus Bombardier (BBD.B) Please refer to the EVA Executive Summary Reports at the end of this section in reading the following evaluation. SUMMARY ANALYSIS Royal Bank s Return on Capital (ROC) is much better than its Cost of Capital (COC) and therefore its ROC/COC ratio (called the Performance Index) is over 1. Royal Bank is then creating positive EVA. Furthermore, its positive EVA has been constant over the last 5 years. Based on its past outstanding economic performance, it has a sustainable and a value-add business model. We can also see that its stock price has been following pretty closely its Intrinsic Value (IV); this is called the IV Traction. Its /Intrinsic (P/IV) ratio has been constant at over the last 2 years. The stock is therefore not over-evaluated by the market. Even though its economic performance is improving since 2005, Bombardier s Return on Capital (ROC) is still lower than its Cost of Capital (COC) and that has been the fact during the last 5 years. Bombardier is therefore not creating any EVA and that has a negative impact over its Intrinsic Value (IV) which is maintained positive solely because of its significant amount of invested Capital (Sum of all its assets). The value of a company is much more related to its capacity to generate a significant cash flow from its well managed assets rather than to the size of its assets. The fact that the IV is low makes that the /Intrinsic Value (P/IV) ratio is well over 1, which shows a relatively high price for that stock (over 2.5 during the past 2 years). The market s expectations in regard to future growth is reasonable based on the fact that Future Growth Value (FGV) is under 10% and has even been negative during some periods over the last 5 years. The market s expectations are pretty high on Bombardier s. It has been maintained between 40% and 80% during the past 5 years which shows that this stock is constantly priced at a pretty high premium level. 11

12 From a pure EVA standpoint, Royal Bank demonstrates a constant positive EVA growth and in the last year only, the EVA change per share has doubled what it was in the previous year. Bombardier is clearly demonstrating an improvement in its EVA creation since 2005 even if it is still maintained at a negative level. This is a very strong sign of company s performance improvement. Royal bank has doubled its dividends in the last 5 years, demonstrating a strong performance. The Free Cash Flow item (Operating Cash Flow Capital Expenditures Dividends) cannot be interpreted for Financial Institutions. Bombardier s dividend has been cut to $0 3 years ago implying for a mature company such as Bombardier that the company was and still is in a difficult situation even though business performance has improved The Free Cash Flow analysis indicates that it has always been negative in the last 5 years with a peak of $2 B in 2003 and averaging $200 K / year since

13 IN SUMMARY FOR AN INVESTOR Single indicators in isolation mean nothing. We really have to compound many indicators together and analyze their trend in order to develop an appropriate assessment. The EVA Executive Summary report with its 5 years of historical data is a very valuable tool to make the necessary assessment before you consider buying or selling a stock. Here is a summary of how to rapidly analyze a company from an Economic Value Added standpoint. The 5 following indicators are the most important in making a good assessment: - Right from the first lines of page 1, the Performance Spread (delta between ROC and COC) shows if the company s ROC is greater than its COC. By how much is it greater and how long has it been greater are then the two next questions to be asked. However, depending on the industry sector in which the company operates, an appropriate level of performance spread could be quite different from a company to another; this is why the Economic Performance Index (EPI) which is the ratio between ROC and COC could be a better indicator to compare companies amongst themselves. The Performance Index is found on page 3 of the report; obviously, the EPI has to be greater than 1 to consider buying a stock. Again, look at sustainability of the EPI and not just at a single reading. - The second important indicator is the /Intrinsic Value (P/IV) ratio showing if the stock is fairly, over or under-valued, and the traction of IV over the share price; this number also appears on page 1 of the report, towards the end. Comparing a company s intrinsic value with its stock price tells you if the price is right and sustainability indicates if the timing to buy is the right one; also, always look at how is the stock price tracking compared to its intrinsic value; this will tell you if over the years, the stock price has responded well to a change in the IV. - Now that we know that a company has a good economic performance (EPI>1) and that its stock price is not too high (P/IV<1), the next question to ask is how big is the risk in investing in that stock? The presented on page 2 will help evaluating one of the important risks related to buying a stock. The FGV shows how inflated is the stock price compared to its real value which is the Current Operations Value (COV) also calculated on page 2. If a stock has a negative FGV, this means that the stock is discounted (in opposition to carrying a premium) which is good for an investment. So always look for an FGV level that you are comfortable with; the FGV does not necessarily have to be negative to be good, but it has to be at a level that you are ready to go to acquire that stock. Last point to consider is if the premium level and the growth factor embedded in the share price is consistent with the nature of the industry under analysis. - A fourth very important indicator that can be found on page 3 is the EVA Change. The change in EVA is even more important than the EVA itself. A company that has shown a consistently improving EVA over the last quarters or years can be a good buy even if the EVA itself is still not positive. Conversely, a company that is generating wealth for its share holders but has a decreasing EVA should be looked at more carefully before buying. - Last but not least: the Dividend level. Dividends are a way to greatly improve the performance of your portfolio, especially during tough periods of the stock market. Dividends are shown on page 4 of the EVA Summary report. Many more indicators should be evaluated from the EVA Executive Summary report. However, looking at these 5 major ones is a way to very rapidly evaluate if a stock is a good investment or not. They could also be used to identify stocks that should be sold; for example, if a stock price is getting very close to its intrinsic value or if you see that the FGV is suddenly getting positive or if the EVA change has been turned to be negative in the last quarter or two. Good luck in your stock evaluations. Let us know of any question that you may have in analyzing the stocks that you are considering as your next moves in investing. 13

14 STOCKPOINTING WITH EVA! Royal Bank EVA Executive Summary Report

15 EVA Executive Summary ''Economic Value Added'' ROYAL BANK OF CANADA RY. page 1 of 4 Address Telephone Stock Exchange Web Site Fiscal Year Economic Sector SIC / Earning Ratio / Book Value Ratio Currency 200 Bay St Toronto, Ontario CANADA M5J2J TSE October Financials CND $ in Millions Report Date : 07 : $ Intrinsic Value Calculated Adjusted : $ $ Trailing 36 Months : $ $ Market Value of Total Capital : 73, % - Invested Capital : 26, % = Market Value Added : 47, % Market Value of Total Capital : 73, % - Current Operating Value : 66, % = Future Growth Value : 6, % Peers US: Peers CND: ANZ BBD USB ITU WBK KB WF SHG MFG IRE UBB BBV AIB IBN NBG BNS TD CM BMO NA INTRINSIC VALUE I.V. ($) 70 Intrinsic Value $70 I.V. ($) 70 Intrinsic Value Trailing 36 Months $ $60 $50 $40 $30 $ $60 $50 $40 $30 $20 10 $10 10 $10 0 $0 0 $0 Intrinsic Value Intrinsic Value Trailing 36 Months PERFORMANCE 2, , , , , NOPAT 2, , , , , , , , , , Capital 18, , , , , % 17.1% 16.4% 18.0% 20.5% = Return / Capital 16.5% 16.0% 16.6% 17.2% 18.4% 7.8% 6.1% 6.6% 7.6% 8.0% - Cost of Capital 7.8% 6.1% 6.6% 7.6% 8.0% 8.3% 11.0% 9.9% 10.4% 12.4% = Performance Spread 8.7% 9.9% 10.0% 9.6% 10.4% VALUATION 24, , , , , Future EVA 25, , , , , , , , , , Capital (Adj. Mid-Year) 18, , , , , , , , , , = Total IV 44, , , , , Long Term Debt Other Liabilities , , , , , = IV of Equity 44, , , , , , , , , , Shares Outstanding 1, , , , , $ $ $ $ $ = IV of a Share $ $ $ $ $ $ $ $ $ $ Adjusted I.V. $ $ $ $ $ $ $ $ $ $ Share $ $ $ $ $ Comments: / Intrin. Value FOR INFORMATIONAL PURPOSES ONLY. The information contained in this publication has been obtained from a variety of sources. We cannot vouch for their reliability. However, through our analysis we attempt to provide reliable information. We do not guarantee accuracy or completeness. This document is published solely for informational purposes and should not be construed as a solicitation to buy or sell any security. All opinions and estimates included in this report represent our judgment as of this date and are subject to change without notice. Delivery of this publication shall not, under any circumstances, create any implication that there has been no change in the information provided herein from the date of this report. StockPointer Inc., its principals or its affiliates may maintain ownership positions in any of the companies mentioned in this report. Copyright 2001 StockPointer International inc. - All Rights Reserved 16jul07 EVA is a registered Trademark of Stern Stewart & Co. 11:48:57

16 EVA Executive Summary ''Economic Value Added'' ROYAL BANK OF CANADA RY. page 2 of 4 Address Telephone Stock Exchange Web Site Fiscal Year Economic Sector SIC / Earning Ratio / Book Value Ratio Currency 200 Bay St Toronto, Ontario CANADA M5J2J TSE October Financials CND $ in Millions Report Date : 07 : $ Intrinsic Value Calculated Adjusted : $ $ Trailing 36 Months : $ $ Market Value of Total Capital : 73, % - Invested Capital : 26, % = Market Value Added : 47, % Market Value of Total Capital : 73, % - Current Operating Value : 66, % = Future Growth Value : 6, % Peers US: Peers CND: ANZ BBD USB ITU WBK KB WF SHG MFG IRE UBB BBV AIB IBN NBG BNS TD CM BMO NA MARKET PERFORMANCE 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, ,000 70,000 60,000 50,000 40,000 30,000 20,000 10, ,000-20,000 Invested Capital MVA Current Op. Value FGV Quarterly $ $ $ $ $ $ $ $ $ $ , , , , , Total Market Value 61, , , , , , , , , , Invested Capital 24, , , , , , , , , , = MVA 37, , , , , % 53% 55% 61% 64% % Market Value 61% 59% 62% 62% 64% Current Operating Value (COV) 2, , , , , NOPAT 4, , , , , % 6.1% 6.6% 7.6% 8.0% Cost of Capital 7.6% 7.7% 7.6% 8.0% 8.0% 37, , , , , = COV 57, , , , , % 132% 113% 94% 91% % Market Value 94% 101% 101% 94% 91% 39, , , , , Total Market Value 61, , , , , , , , , , COV 57, , , , , , (12, ) (6, ) 3, , = FGV 3, ( ) ( ) 4, , % -32% -13% 6% 9% % Market Value 6% -1% -1% 6% 9% Comments: FOR INFORMATIONAL PURPOSES ONLY. The information contained in this publication has been obtained from a variety of sources. We cannot vouch for their reliability. However, through our analysis we attempt to provide reliable information. We do not guarantee accuracy or completeness. This document is published solely for informational purposes and should not be construed as a solicitation to buy or sell any security. All opinions and estimates included in this report represent our judgment as of this date and are subject to change without notice. Delivery of this publication shall not, under any circumstances, create any implication that there has been no change in the information provided herein from the date of this report. StockPointer Inc., its principals or its affiliates may maintain ownership positions in any of the companies mentioned in this report. Copyright 2001 StockPointer International inc. - All Rights Reserved 16jul07 EVA is a registered Trademark of Stern Stewart & Co. 11:48:58

17 EVA Executive Summary ''Economic Value Added'' ROYAL BANK OF CANADA RY. page 3 of 4 Address Telephone Stock Exchange Web Site Fiscal Year Economic Sector SIC / Earning Ratio / Book Value Ratio Currency 200 Bay St Toronto, Ontario CANADA M5J2J TSE October Financials CND $ in Millions Report Date : 07 : $ Intrinsic Value Calculated Adjusted : $ $ Trailing 36 Months : $ $ Market Value of Total Capital : 73, % - Invested Capital : 26, % = Market Value Added : 47, % Market Value of Total Capital : 73, % - Current Operating Value : 66, % = Future Growth Value : 6, % Peers US: Peers CND: ANZ BBD USB ITU WBK KB WF SHG MFG IRE UBB BBV AIB IBN NBG BNS TD CM BMO NA ECONOMIC PERFORMANCE 6,000 5,000 4,000 3,000 2,000 1,000 EVA, Net Operating Profit $70 $60 $50 $40 $30 $20 $10 1,600 1,400 1,200 1, EVA, Net Operating Profit Quarterly $70 $60 $50 $40 $30 $20 $10 0 $0 0 $0 EVA Net Op. Profit 12M EVA Net Op. Profit Quarterly Net Operating Profit After Tax (NOPAT) 6, , , , , Operating Profit 2, , , , , Adjustments , , , , , Income Tax , , , , , = NOPAT 1, , , , , Economic Value Added (EVA) 2, , , , , NOPAT 1, , , , , , , , , , Capital Charge , , , , , = EVA Change in EVA (91.470) ( ) Analysis 18, , , , , Capital 24, , , , , % 17.1% 16.4% 18.0% 20.5% Return / Capital 4.6% 5.1% 5.5% 5.8% 5.0% Performance Index EVA / Capital $ 1.30 $ 1.56 $ 1.74 $ 2.06 $ 2.68 EVA / Share $ 0.50 $ 0.61 $ 0.68 $ 0.78 $ 0.61 $ 0.40 $ 0.26 $ 0.18 $ 0.32 $ 0.62 Change in EVA / Share $ (0.07) $ 0.11 $ 0.07 $ 0.09 $ (0.17) Comments: FOR INFORMATIONAL PURPOSES ONLY. The information contained in this publication has been obtained from a variety of sources. We cannot vouch for their reliability. However, through our analysis we attempt to provide reliable information. We do not guarantee accuracy or completeness. This document is published solely for informational purposes and should not be construed as a solicitation to buy or sell any security. All opinions and estimates included in this report represent our judgment as of this date and are subject to change without notice. Delivery of this publication shall not, under any circumstances, create any implication that there has been no change in the information provided herein from the date of this report. StockPointer Inc., its principals or its affiliates may maintain ownership positions in any of the companies mentioned in this report. Copyright 2001 StockPointer International inc. - All Rights Reserved 16jul07 EVA is a registered Trademark of Stern Stewart & Co. 11:48:58

18 EVA Executive Summary ''Economic Value Added'' ROYAL BANK OF CANADA RY. page 4 of 4 Address Telephone Stock Exchange Web Site Fiscal Year Economic Sector SIC / Earning Ratio / Book Value Ratio Currency 200 Bay St Toronto, Ontario CANADA M5J2J TSE October Financials CND $ in Millions Report Date : 07 : $ Intrinsic Value Calculated Adjusted : $ $ Trailing 36 Months : $ $ Market Value of Total Capital : 73, % - Invested Capital : 26, % = Market Value Added : 47, % Market Value of Total Capital : 73, % - Current Operating Value : 66, % = Future Growth Value : 6, % Peers US: Peers CND: ANZ BBD USB ITU WBK KB WF SHG MFG IRE UBB BBV AIB IBN NBG BNS TD CM BMO NA ACCOUNTING PERFORMANCE EPS (Diluted) and $70 $60 $50 $40 $30 $20 $ EPS (Diluted) and Quarterly $70 $60 $50 $40 $30 $20 $ $0 0.0 $0 EPS - Diluted EPS - Diluted Quarterly 23, , , , , Selected Income Statement Items Sales 8, , , , , , , , , , Cost of Goods Sold 3, , , @NA R @NA 6, , , , , Operating Profit 2, , , , , , , , , , Net Income 1, , , , , $ 0.81 $ 0.94 $ 1.07 $ 1.31 $ 1.62 Dividends $ 0.36 $ 0.36 $ 0.40 $ 0.40 $ 0.46 $ 2.06 $ 2.34 $ 2.59 $ 2.96 $ 4.04 EPS $ 0.87 $ 0.92 $ 0.97 $ 1.16 $ 0.99 $ 2.03 $ 2.31 $ 2.55 $ 2.92 $ 3.98 EPS - Diluted $ 0.86 $ 0.91 $ 0.95 $ 1.14 $ , , , , , Common Shares 1, , , , , Selected Balance Sheet and @NA @NA 87, , , , , Other Assets 106, , , @NA @NA 373, , , , , Total Liabilities 481, , , , , , , , , , Common Equity 19, , , , , ( ) , , Free CashFlow 6, (11, ) (8, )(14, ) 3, Comments: FOR INFORMATIONAL PURPOSES ONLY. The information contained in this publication has been obtained from a variety of sources. We cannot vouch for their reliability. However, through our analysis we attempt to provide reliable information. We do not guarantee accuracy or completeness. This document is published solely for informational purposes and should not be construed as a solicitation to buy or sell any security. All opinions and estimates included in this report represent our judgment as of this date and are subject to change without notice. Delivery of this publication shall not, under any circumstances, create any implication that there has been no change in the information provided herein from the date of this report. StockPointer Inc., its principals or its affiliates may maintain ownership positions in any of the companies mentioned in this report. Copyright 2001 StockPointer International inc. - All Rights Reserved 16jul07 EVA is a registered Trademark of Stern Stewart & Co. 11:48:58

19 STOCKPOINTING WITH EVA! Bombardier EVA Executive Summary Report

20 EVA Executive Summary ''Economic Value Added'' BOMBARDIER INC -CL B BBD.B page 1 of 4 Address Telephone Stock Exchange Web Site Fiscal Year Economic Sector SIC / Earning Ratio / Book Value Ratio Currency 800 Rene-Levesque Blvd W Suite 2900 Montreal, Quebec CANADA H3B1Y TSE January Industrial CND $ in Millions Report Date : 07 : $ 6.64 Intrinsic Value Calculated Adjusted : $ 1.43 $ 4.21 Trailing 36 Months : $ (0.58) $ 3.39 Market Value of Total Capital : 23, % - Invested Capital : 16, % = Market Value Added : 6, % Market Value of Total Capital : 23, % - Current Operating Value : 11, % = Future Growth Value : 11, % Peers US: Peers CND: LLL GR PCP COL ATK SPR DRS AH DCP ESLT TDY MOG.A CW BEAV HXL CAE MAL RNO HRX NAS AVP CEP GDI.U AIQ OSI INTRINSIC VALUE I.V. ($) Intrinsic Value $14.00 $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $0.00 I.V. ($) Intrinsic Value Trailing 36 Months $8.00 $6.00 $4.00 $2.00 $14.00 $12.00 $10.00 $0.00 Intrinsic Value Intrinsic Value Trailing 36 Months PERFORMANCE , NOPAT 1, , , , , , Capital 25, , , , , % 1.7% 2.6% 5.2% 6.4% = Return / Capital 5.1% 3.3% 2.3% 2.9% 4.7% 6.0% 7.7% 6.2% 8.7% 8.9% - Cost of Capital 6.0% 7.7% 6.2% 8.7% 8.9% -3.4% -6.0% -3.6% -3.5% -2.5% = Performance Spread -0.9% -4.3% -3.9% -5.8% -4.3% VALUATION (14, )(18, )(10, ) (6, ) (5, ) Future EVA (4, )(13, )(11, ) (9, ) (8, ) 25, , , , , Capital (Adj. Mid-Year) 25, , , , , , , , , , = Total IV 21, , , , , , , , , , Long Term Debt 8, , , , , , , , , , Other Liabilities 5, , , , , (2, ) (7, ) (4, ) , = IV of Equity 8, (2, ) (5, ) (3, ) (1, ) 1, , , , , Shares Outstanding 1, , , , , $ (1.94) $ (4.47) $ (2.80) $ 0.19 $ 1.43 = IV of a Share $ 5.66 $ (1.65) $ (3.23) $ (2.03) $ (0.58) $ 3.19 $ 0.98 $ 0.21 $ 3.15 $ 4.21 Adjusted I.V. $ 4.94 $ 2.42 $ (0.40) $ 1.22 $ 3.39 $ 3.47 $ 6.04 $ 2.59 $ 4.30 $ 4.57 Share $ 3.47 $ 6.04 $ 2.59 $ 4.30 $ 4.57 (1.79) (1.35) (0.93) / Intrin. Value 0.61 (3.65) (0.80) (2.11) (5.00) Comments: FOR INFORMATIONAL PURPOSES ONLY. The information contained in this publication has been obtained from a variety of sources. We cannot vouch for their reliability. However, through our analysis we attempt to provide reliable information. We do not guarantee accuracy or completeness. This document is published solely for informational purposes and should not be construed as a solicitation to buy or sell any security. All opinions and estimates included in this report represent our judgment as of this date and are subject to change without notice. Delivery of this publication shall not, under any circumstances, create any implication that there has been no change in the information provided herein from the date of this report. StockPointer Inc., its principals or its affiliates may maintain ownership positions in any of the companies mentioned in this report. Copyright 2001 StockPointer International inc. - All Rights Reserved 16jul07 EVA is a registered Trademark of Stern Stewart & Co. 11:47:53