Intrinsic value of a stock

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vijayM
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Topic: Intrinsic value of a stock
Posted: 16/Jan/2009 at 8:56pm

Dear Basantji / Teddies,

Warren buffett has said it is not possible to find aaccurately, intrinsic value of a stock for anybody. If it would have been possible, then there would not have been so much difference in perception of a company's value by different people in the market.

However, there should be a way find intrinsic value at any given point of time using all important variables like eps, growth rate, interest rates etc.

Graham has suggested following equation in Intelligent investor:

value = TTMEPS (8.5 + 2 * GROWTH RATE)

FOR EX:

hdfc bank: value = 51(8.5 + 2*30)=3493

L&T value = 40(8.5 + 2* 17)=1700

crisil value= 184.5 (8.5+2*28.5)=12085

Note: I have used 10year avg historic growth rate for calculation purpose.

Whether the equation is reliable? or does it have limitations?

Any other method of finding a reliable intrinsic value including more parameters ?

I request Basantji & teddies to share their knowledge in this thread to help us in improving equity analysis.

regards

vijay

* Never count on making a good sale. Have the purchase price be so attractive that
even a mediocre sale will give good results - WARREN BUFFET

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basant
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Posted: 16/Jan/2009 at 9:43pm

There seems t be something wrong in the equation! How can stocks trade at 2 times plus 8.5 times growth rate?

If you could tell the future from a Balance Sheet then accountants and mathematicians would be the richest people in the world. I could be buying & selling stocks recommended here.Read the DISCLAIMER.

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abhishekbasu
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Posted: 16/Jan/2009 at 10:03pm

The complete Graham's formula is actually
Intrinsic Value=EPS*(8.5+(2*GROWTH))*4.4/Risk Free Rate

The explanation of this formula is given in Graham's Security Analysis. This formula provides a thumb-rule of what the intrinsic value could be. This is by no means a definitive figure.

--> Buy right and sit tight!!

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basant
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Posted: 16/Jan/2009 at 10:06pm

Can you indicate the page number on Security Analysis?

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Hitesh Shah
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Posted: 16/Jan/2009 at 10:18pm

Here are two links:
http://www.stock-investment-made-easy.com/calculate-intrinsic-value.html

and
http://www.teenanalyst.com/stocks/intrinsic.html

However, there should be a way find intrinsic value at any given point of time using all important variables like eps, growth rate, interest rates etc.

No matter what, it will still be an estimate.

And, as we have seen over the years, at any given time sentiment overules any other parameters in determining the CMP.

Bluntly speaking, forward EPS, growth rate, and interest rates can only be guessed and current sentiment will influence the guess work.

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kumardiwesh
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Posted: 16/Jan/2009 at 10:18pm

Actually this formula is used to find out the EPS growth a stock needs to show to justify its price.

For instance, assume that a stock like TCS' value as of today is Rs 1,240 and its EPS is Rs 57.65. Now, these two figures can help us arrive at a growth rate in terms of percentage at which the company's profits need to grow to sustain a price of Rs 1,240.

Let us calculate 'g' for TCS by substituting the assumed values in Graham's formula.

1,240 = 57.65 * (8.5 + 2*g)

Therefore, 1,240/57.65 = 8.5 + 2*g

Therefore, 21.5 = 8.5 + 2*g

Therefore, 21.5 - 8.5 = 2*g

Therefore, 13 = 2*g

Therefore, g = 13/2

Therefore, g = 6.5.

So according to Graham's formula, for TCS to sustain a price of Rs 1,240 every year, its net profits need to grow at a rate of 6.5 per cent every year.

"History does not tell you the probability of future financial things happening" - Warren Buffett

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vijayM
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Joined: 21/Dec/2007
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Posted: 16/Jan/2009 at 10:30pm

page no. 295 on intelligent investor. no idea about other book.

vijay

* Never count on making a good sale. Have the purchase price be so attractive that
even a mediocre sale will give good results - WARREN BUFFET

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vijayM
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Joined: 21/Dec/2007
Location: India
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Posts: 366

Posted: 16/Jan/2009 at 10:34pm

Originally posted by basant

There seems t be something wrong in the equation! How can stocks trade at 2 times plus 8.5 times growth rate?

it is not 8.5 times. It is 8.5 + (2*growth rate)

* Never count on making a good sale. Have the purchase price be so attractive that
even a mediocre sale will give good results - WARREN BUFFET

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