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To explain the premise, please read the following from the 1992 Berkshire Hathaway Chairman's Letter in which Warren Buffett wrote the following:
"In The Theory of Investment Value, written over 50 years ago, John Burr Williams set forth the equation for value, which we condense here: The value of any stock, bond or business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset." - 1992 letter (all letters)
Free Cash Flow is the money generated in a year which can be used to grow the business and pay dividends. Free cash flows can be thought of as being similar to the payout of a CD or bond.
Total Equity is Total Assets less Total Liabilities. If all liabilities were to be paid off by assets, total equity is what would remain.
To arrive at an estimated value, the screener uses a 6 year average of FCF and the most recently reported Total Equity. The following formula is then applied:
Value = (Growth Multiple)*FCF(6 year avg) + 0.8*Total Equity(most recent)
The growth multiple is based on historical growth data. An estimate for growth is calculated which ranges from 4.5% to 11%. This growth rate is then used to determine a growth multiple in the range of 8.6 to 13.5. This multiple is based on projections of the future free cash flows discounted at an appropriate rate. This multiple does take taxation into consideration. For a complete explanation of how the growth multiple is determined, please read the detailed explanation that is linked at the end of this discussion.
If ABC corp has a Growth Assumption of 8%, a Growth Multiple of 11 will be used. If the 6 year average FCF of $100 million and Total Equity is $500 million, Value is determined as follows:
Value = (11)*$100m + 0.8*$500m
Value = $1100m + $400m
Value = $1500m = $1.5B
If there are 100 million shares of ABC corp, the value is $15/share ($1.5B divided by 100 million shares).
In using this screener, please remember that this is an idea generator and that further research and a more detailed valuation should be performed. The future free cash flow growth estimates and total equity weighting are not equal for all stocks. Each stock is an individual case which warrants deeper study.
For a more detailed explanation of how this screener operates, please read this article: New Feature Announcement: Discounted Free Cash Flow Screener.
NOTE: Companies that are more than 4 months delinquent with their annual reporting are not included in the results. Also, financials are excluded.
What is in this page:The Discounted Free Cash Flow Screener uses free cash flow (FCF) and total equity to estimate the intrinsic value of a company. The free version provides a sample of 15 larger market cap stocks. The premium version typically provides hundreds of undervalued companies along with a filtering mechanism.
For more information on how this screener works, please read the "Discounted Free Cash Flow Screener Explanation" above.
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Sample of the filter available to Premium Members.