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Estimating mid-cycle, normalized earnings with Alex Fitch and Michael Nicolas from Harris Associates (Oakmark Funds)

The JRo Show

NOTE

Valuing Companies Based on Normalized or Mid-Cycle Earnings

The importance of considering normalized or mid-cycle earnings when valuing companies varies depending on the stability of their earnings. For companies with consistent earnings, mid-cycle analysis is not as crucial, whereas for companies with volatile earnings, it is essential. When valuing a company with uncertain annual earnings, it is incorrect to simply apply a multiple to the current year's profits. Instead, the approach should be to capitalize the expected value of the earnings over time, known as normalized or mid-cycle earnings power, to determine the intrinsic value of the business.

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