Conclusion
Cyclical and commodity companies have volatile earnings, with the volatility coming from macroeconomic factors that are not in the control of these companies. As the economy weakens and strengthens, cyclical companies see their earnings fluctuate, and commodity companies see their earnings and cash flows track the commodity price.
When valuing these companies, analysts make one of two mistakes. They either ignore the economic and commodity price cycles, and assume that the current year’s earnings and cash flows (which are a function of where we are in the cycle) will continue forever, or they expend resources trying to forecast the cycle in the long term. We presented two ways of valuing these firms. In the first, we look past the ...
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