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The Key to Valuation in Theory and Practice

This article first appeared on The Market, April 17th, 2022

To invest successfully, we have to get a differentiated understanding of a company’s valuation. With this premise in mind, finance students at the University of Lugano looked for attractively valued names in the Swiss stock market. In their view, these three stocks harbor considerable upside potential.

Investing successfully is about having differential information. Most commonly, people think of relevant investing information as having an insight into how the next quarter will play out. Certainly, one type of useful information. However, as the wild earnings day swings for Amazon and Meta recently demonstrated, computer programs trade that information away immediately.

Traditional asset managers and normal investors have little chance to compete against such forces. But in the same way that unearthing undervalued stocks often requires swimming against the tide, investors can focus on approaches that are not popular, yet a powerful source of investing success: valuation.

While a quarterly report provides a clear trading signal (up or down), valuation is more nuanced and layered. For example, did a firm miss for the quarter because it is investing more in the future? Meta (formerly known as Facebook) incurred $10 billion of expenses to build out the Metaverse in Q4. How much was R&D, which has the property of a longer-term investment versus legitimate period expenses?

For valuation the answer is much more important, than immediately trading an earnings announcement. In addition to allowing a more nuanced analysis, a focus on valuation allows investors to exploit time. So often investors are focused on immediate results, which leads to over-reactions and creates profitable investment opportunities.

Returning to Meta, should it have lost $250 billion of market cap in the span of 30 minutes after it announced earnings February 3? If an investor has a long-term horizon and confidence in estimating the true or intrinsic value of a company such extreme movements present opportunities for future excess returns.

Three Investment Ideas

With the premise that valuation creates an information differential versus the market for skilled investors, we discuss three investment ideas that resulted from a collaboration between graduate students at the Università delle Svizzera italiana and Applied Finance to value Swiss companies as part of the curriculum of Professor Francesco Franzoni’s Investment Analysis course.

The students developed a fundamental review on various publicly traded companies and selected those that had interesting catalysts taking place in their business or industry that would affect them favorably into the future. Understanding that good news is not sufficient for successful investing, the students then utilized Applied Finance tools to determine which firms appear undervalued and thus a potentially attractive investment.

With that in mind, we are going summarize the bullish case for Holcim, Roche and Kuehne + Nagel.

The investment case for Holcim and Roche was developed by:

Stefan Ciric

Vittorio De Francesco

Arian Maxhuni

Rame Metaj

Stefano Viviano

The investment case for Kuehne + Nagel was analyzed by:

Federico Bianchi

Alfredo Carannante

Matteo Corti

Simone Giay

Luca Torchio

The key to valuation is having insights into three aspects: a firm’s sales, profit margins, and capital expenditures. To summarize the inputs into each firm’s valuation, we have framed the forecast data relative to each firm’s past performance across these metrics using past 5 years and 3 years median values, along with its last actual year metrics.

In addition, for each firm we provide a summary of the catalysts the students have identified for each stock that potentially indicate the stocks may close their intrinsic value gap in the future, generating alpha for investors.


Intrinsic Value

Holcim’s equity was traded at its intrinsic value from 2011 until 2016. Since 2017, the equity is trading at a discount to its intrinsic value. This discount has grown over the years. The reason for this detachment was an overreaction due to a decrease in revenues from the financial year 2016 to 2017.

To the group this substantial gap between intrinsic value and market price is a huge opportunity for investors, as they believe that the convergence to the intrinsic value will happen in the near future due to catalyst events explained further below. The current price of the equity is about CHF 44, the target is set at CHF 95, with a growth potential of more than 100%. The students believe that the catalysts explained below, will boost the growth of the company.


The catalysts which may lead the convergence of the market price of Holcim‘s equity to its intrinsic value are:

  1. M&A Deal on Malarkey Roofing
  2. Early accomplishment of the 2022 Strategy Goals
  3. Announcement of the 2025 Strategy Goals
  4. Compliance with Green Taxonomy

The purchase of Malarkey Roofing will further increase market growth in the US roofing market which is estimated to be $19 billion. The company has double digit growth and will increase Holcim’s earnings per share in the first year after acquisitions, ergo 2022. Furthermore, it is a strategic investment to increase the Solutions Products share of revenue to 30% which will also help to achieve less CO2 emissions.

In November 2021 Holcim announced its new Strategy 2025 to accelerate growth, decarbonize the business and deliver high returns on invested capital as well as an increase in recurring EBIT growth. This program is ambitious but given the fact that Holcim achieved its Strategy 2022 goals one year earlier, the group believes that due to this momentum in the business it will also be able to achieve the goals of its 2025 strategy.

Lastly, in 2022 parts of the European Unions Taxonomy will get into power, helping to prevent green washing and showing which companies are fighting climate change. This has strong implications on companies and investors. Holcim is very well placed to comply to the EU‘s Taxonomy as it is the first company in its sector to state net carbon neutrality as a goal and is actively pursuing sustainable and green alternatives to its main business of concrete production.

Ukraine-Russia Situation

Holcim’s business model is robust as it has a very high recurring EBITDA margin and construction is possible under pretty much every environment. Nonetheless, the current conflict between Ukraine and Russia might be a possible source of negative returns. Given the nature of the catalysts explained above, as none of these depend on Russia or Ukraine, the group does not believe that the convergence of Holcim’s equity from the current market level to its intrinsic value will be harmed or slowed substantially by this conflict.

It’s important to note that less than 1% of Holcim’s sales come from Russian customers and Holcim’s CEO stated that there are no dependencies on Russian energy to maintain their plants in Europe. What is currently happening in the Ukraine is horrible and one can only hope that this conflict ends soon, but the group does not believe that it will have a major impact on Holcim’s price of equity.

The investment case for Holcim and Roche was developed by: Rame Metaj, Stefano Viviano, Arian Maxhuni, Stefan Ciric, Vittorio De Francesco (left to right).

Kuehne + Nagel


Kuehne + Nagel is global leader in the sea, air and road freight. The company recorded a remarkably strong performance in financial year 2021. Despite the recent supply chain issues all business units were able to exceed their prior-year results, providing optimal solutions to logistic problems for customers.

In November, the Board of Directors of Kuehne + Nagel started top management changes, and the company became the first air freight provider to offer sustainable aviation fuel for all shipments. Eventually, in February 2022, the company concluded a long-term contract with Atlas Air to operate globally two Boeing 747-8 freighters.

Intrinsic Value

From 2011 to 2017 the company has been overvalued, and only after 7 years it managed to reach a fair price with respect to the market. Whereas in 2018 and 2019 Kuehne + Nagel has been fairly priced, in 2020 the promising growth expectations and the financial analysis performed lead us to consider the stock as underpriced.

Moreover, in financial year 2021 the company significantly increased all of its key figures relative to the previous year: net turnover climbed 61% to CHF 32.8 billion, EBIT soared 175% to CHF 2.9 billion and earnings for the year surged by 173% to CHF 2.2 billion. Due to the fact that the current market price is around CHF 261, while the 5-year target price is CHF 850, our strong buy recommendation is confirmed.

Ukraine-Russia Situation

The situation in Ukraine affected the strategy of Kuehne + Nagel. As of the start of March 2022, the company suspended all import shipments into the Russian Federation, except for pharma, healthcare, and humanitarian supplies. Kuehne + Nagel had to stop the acceptance of bookings for rail transports (Eurasia Express) to and from Europe, as these transports pass through the Russian Federation.

There are also some indirect consequences on global trade and logistic flows. The closure of the air corridors over Russia and Ukraine and the ban of Russian aircrafts from North American and European airspace have led to capacity restrictions and longer lead times, with some long-haul flights, particularly in the Eurasian hemisphere, increasing by three hours. The CEO said that the economic development cannot be comprehensively assessed yet.

The investment case for Kuehne + Nagel was analyzed by: Alfredo Carannante, Luca Torchio, Matteo Corti, Federico Bianchi, Simone Giay (left to right).


Intrinsic Value

Roche has been trading below its intrinsic value for over ten years. It seems that the market has failed to recognize the value of this company, but the pandemic has brought attention back to a sector full of possibilities. In addition, with an analysis of its direct competitors, it is clear that Roche is a company that not only manages to stay competitive with other players in the market, but also has the potential to be an excellent addition to every investor’s portfolio.

According to our analysis, Roche has the potential to reach its intrinsic value. Current price of the equity is CHF 391, the target is set at CHF 632, with a growth potential of more than 60%. The students believe that the catalysts explained below will boost the growth of the company.


According to the groups analysis, there are essentially three catalysts that will trigger the process of market price convergence toward Roche’s intrinsic value.

First, Basel-based pharmaceutical group Roche has obtained EC (European conformity) designation for the use of its Cobas 6800/8800 devices for salivary testing to detect coronavirus, including the Omicron variant.

Because of their noninvasive nature, these tests are more tolerable for people who must get tested, such as those who work in high-risk environments. The sampling method can also help to reduce the risk of exposure to the virus for healthcare workers. This will drive sales up, especially internationally given the fear of the Omicron variant.

Second, on December 27 2021, it has been announced that the Food and Drug Administration (FDA) has given emergency use authorization for the Covid-19 self-tests in the US from January on. Roche pointed out that its self-test kit allows accurate results in just 20 minutes for all known variants of the coronavirus, including Omicron.

The FDA also granted priority approval because Roche’s tests can meet the current demand in the United States. The company has the capacity to produce tens of millions of tests per month. This again will boost sales in the most important economy and will serve as a catalyst event to speed up convergence from market value to intrinsic value.

Third, another important statement worth mentioning is that Novartis had purchased Roche voting shares between 2001 and 2003 for a total of approximately CHF 4.6 billion. Roche’s buyback program has been approved, and they bought back the entire stake belonging to Novartis for approximately 19 billion CHF on December 6 2021. This consolidates Roche’s voting right shares within the owner-family and the general shareholders, as the bought back shares will be canceled.

Ukraine-Russia Situation

Roche’s business model is robust as the main sales come from products in the fields of diagnostics and pharmaceuticals. These areas are growing, especially diagnostics had a double-digit revenue increase. Roche mostly sells its products and services to the US. Neither Russia nor Ukraine are drug manufacturing hubs, and market exposure for Roche is minimal.

The company runs studies in Ukraine and might face delays in future clinical trials if the war persists for a long period. In any case the covid situation in hospitals is still present, driving the performance of the company as the need for diagnostics and pharmaceuticals regarding Covid-19 will most likely prevail throughout the year.


Examining the student models, each of the companies has interesting catalysts, and the forecasted models have reasonable inputs relative to historic actuals, which when translated into a intrinsic values show attractive upside.

Regarding Kuehne + Nagel, the firm hit an inflection point with its most recent year sales exploding relative to its history. The model assumes future growth at 50% level to recent gains, which if correct result in an intrinsic value considerably above its traded price.

Over the coming year, it will be interesting to evaluate the models and review how these intrinsic value estimates compare versus actual prices.

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