Posted by: sanjayshetty | October 9, 2007

How do you figure the value of a company? Determining Intrinsic Value?

Determining the value of a company to purchase is at times more art than skill. I’ve found the resources listed below quite helpful in evaluating companies worthy of purchase and then pegging a value or price to the stock. Benjamin Graham referred to this as the intrinsic value of a stock. The basic idea being that largely the stock market values a stock correctly at it’s intrinsic value however at times Mr. Market has large mood swings and makes available great companies at discounted prices and sometimes values them insanely high. However figuring out the correct value is the key challenge. The links and articles below have helped me, hopefully they will help others as well.

Stock Selection or What to look for when evaluating a company 

Phil Town describes it as The 4 Ms – Meaning, MOAT, Management, and MOS(Margin of Safety) you can read about Phil’s method on his bloghttp://philtown.typepad.com/phil_towns_blog/2006/02/the_four_ms_qui.html 

Joe Ponzio also has a post on Finding Companies Worth Analyzing – http://www.fwallstreet.com/blog/58.htm

Valuing the busines or determining Intrinsic Value or Sticker Price

Phil Town’s method – Here is an example of calculating the intrinsic value or Sticker price as Phil calls it.
CALCULATING DELL’S STICKER PRICE –
http://www.philtown.typepad.com/phil_towns_blog/2005/11/calculating_del.html 

Phil provides many such examples on his site, and I would recommend reading thru his blog in detail. I for one have learnt a lot from Phil’s excellent book Rule #1: The Simple Strategy for Successful Investing in Only 15 Minutes a Week!  and from his blog. However as my investing intelligence has increased(I think so 😉 I am not extremely comfortable using the PE as a basis for calculation of Intrinsic value or sticker price, however I find his methods of stock selection excellent.

Joe Ponzio of FwallStreet offers a method of calculating the value of a business in a series of posts, he argues that, The only thing that matters in buying a private business is the amount of cash that it can generate—its free cash flow. The Importance Of Valuing A Stock (http://www.fwallstreet.com/blog/3.htm). He next shows you how to Calculate The Value Of A business in a four part series of blog posts http://www.fwallstreet.com/blog/25.htm

Joe also provides a number of valuations of business; Buffett. Coca-Cola. 1988. Now I Get It. in this article he explores Buffet’s purchase of Coca-Cola http://www.fwallstreet.com/blog/24.htm here he works here’s another I like, titled: Buying Johnson & Johnson – http://www.fwallstreet.com/blog/4.htm

Other sites:

http://www.valuepro.net/index.shtml Online valuation of a company, only input required is the stock symbol. They also offer a software which you can use offline to do a valuation. Details on their valuation method is also explained at http://www.valuepro.net/abtonline/abtonline.shtml

Another interesting site with a number of interesting articles, and one on calculating intrinsic value is http://www.stock-investment-made-easy.com/calculate-intrinsic-value.html

Resources

In order to simplify the task of using evaluation methods given by the experts mentioned above, there are various tools developed by others.

Phil Town based (Note: Phil doesn’t recommend or subscribe to the validity of these resources):

  • http://www.stock2own.com/ – input a stock symbol and it will automatically work out a valuation based on their understanding of Phil Town’s method + they provide you the ability to tweak the parameters used in the calculation of the sticker price
  • http://www.roicommunity.com/ – Here is a community of investors and one of them has developed an excel based automatic calculator. Check the Downloads Link out there.

Joe Ponzio based (Note: Joe doesn’t recommend or subscribe to the validity of these resources)

  • http://finance.groups.yahoo.com/group/smf_addin/ – This group is the home base for the Stock Market Functions add-in developed by Randy Harmelink. This add-in contains a number of user defined functions for EXCEL that can allow data to be extracted and/or retrieved from the web and placed directly into EXCEL cells or ranges. It works  amazingly well, and if you join this Yahoo group, you will find a file called FWallStreet_Model.xls which automates the process of pulling data of the web and calculating the value of a company. The file is located in the section, Files > Uploads by forum members. Read the forum and documentation section(Under Files) for details on how to install the addin etc.
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Responses

  1. very interesting, but I don’t agree with you
    Idetrorce


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