If you have been checking out stocks on GuruFocus by looking up any stock ticker, you should notice that we added a valuation box that shows the stock prices relative to a few valuation matrices. For instance, this is the valuation box for Wal-mart (WMT):
The valuation box shows the current price of Wal-Mart at $67.59 relative to the following parameters. Put your mouse of the chart to see the values for each parameter.
1. Net Cash of - $26.5 a share
2. Net Current Asset Value (NCAV) of $16.1 a share
3. Projected FCF of $58.65 a share
4. Graham Number of $38.9 a share
5. Median P/S Value of $76.94
6. Peter Lynch Fair Value of $45.2
7. Prof. Bruce Greenwald's Earnings Power Value - Nov. 2014
The valuation box we display will in no way replace your valuation process of the company, but it gives a rough idea of where the company is traded relative to its value. For instance, from the valuation box above we can see that Wal-Mart is traded slightly above the valuation of the DCF model. It is below the historical median relative to sales. Peter Lynch would think Wal-Mart is overvalued because the earnings growth rate is about 9%; it would only deserve a P/E ratio of 9. But Wal-Mart is currently at a P/E ratio of almost 14.5.
We have discussed in detailed how to achieve each valuation in Methods for Arriving at the Fair Value of Companies. Here is a summary:
|Valuation Methods||Asset Based||Earning Power Based||Combination of Asset & Earnings Power||Growth Considered||Comment|
|Net Cash||X||No||Cash & Cash Equivalents + Short Term Investments – Total Liabilities|
|Net Current Asset Value (NCAV)||X||No||Cash and Short-Term Investments + (0.75 * Accounts Receivable) + (0.5 * Inventory) - Total Liabilities|
|Projected FCF||x||Yes||Value = (Growth Multiple)*FCF(6 year avg) + 0.8*Total Equity(most recent)
|Graham Number||x||No||SquareRoot of (22.5 * Tangible Book Value * Earnings per share)|
|Median P/S Value||X||No||Historical range traded relative to sales.|
|Peter Lynch Fair Value||X||Yes||5-Year EBITDA Growth Rate * Earnings per share.
Only applies to companies with consistent growth rate between 8% to 25%. If growth rate is higher than 25%, we use 25%.
Please note that this is different from the value projected in Peter Lynch Chart. In Peter Lynch Chart, the P/E ratio is always 15. But in Peter Lynch Fair Value calculation, P/E ratio is equal to the 5-year average EBITDA growth rate, which can be higher or lower than 15.
Not all parameter will apply. For instance, Peter Lynch's fair value method is only applicable to companies that have relatively consistent growth. The Graham number is only applicable to companies that have positive tangible book value and earnings per share.
Another example is Berkshire Hathaway (BRK.A)(BRK.B). We can see that Berkshire is also traded at below its historical median P/S ratio, but above its tangible book of $77,000 a share and Graham number of $106,000 a share.
Also see the Apple (AAPL) valuation box below:
Because of its tremendous growth, Apple is traded above all the valuation parameters such as DCF, tangible book, etc. But Peter Lynch may think it is still undervalued because its growth value is far higher, even if we cap the growth rate at 25% a year, which is far below its actual growth rate.
The valuation box will also clearly indicate it if a company is traded at below its net current asset value (NCAV). Please see the valuation box for Telestone (TSTC) below.
It is obvious the Chinese wireless network company is currently traded at far below all of its valuation matrix. It is even a Ben Graham Net-Net because it is traded at below its net current asset value.
As discussed in Methods for Arriving at the Fair Value of Companies, a company can be evaluated according to its asset value, its future earnings power, or the combination of both. Please do read its annual/quarter reports to understand more about which will apply.
New: We have added Prof. Bruce Greenwald’s Earnings Power Value as of Nov. 2014.
Disclosure: The author owns Berkshire Hathaway.
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