Finding Instrinsic Value of Stock

[DJMustard]

Hi Guys,

I've been investing for about a year now and I've noticed a lot of members posting share price forecasts by calculating intrinsic value of the company. I assume most members are using some variation of a DCF model or using industry averages and multiples?

I'm keen to understand what people are using, and if anyone is willing to share DCF models they are using?

Much appreciated!

[epower]

Hi Guys,

I've been investing for about a year now and I've noticed a lot of members posting share price forecasts by calculating intrinsic value of the company. I assume most members are using some variation of a DCF model or using industry averages and multiples?

I'm keen to understand what people are using, and if anyone is willing to share DCF models they are using?

Much appreciated!

I haven't invested in individual stocks for some time, but when I was 'value investing' I used a dividend discount model. I wanted a 15% return on invested capital over 5 years time so what I did was best guess a P/E ratio I thought was reasonable for the company to be valued at, a growth rate in earnings I thought was reasonable and dividend payout ratio compared to those earnings and then worked backwards to find a price that I thought I could earn 15% a year on.

Eg.

Earnings in 2018 are $1 and dividends are 50 cents per share. I expect earnings to grow at 8% a year and the dividend ratio to stay 50%

So in 2023, I expect earnings to be $1.47 at 8% growth. Lets say I expect the company to be valued at 16 P/E (147 x 16 = $23.52). In that time, I've earned dividends of;

54 in 2019
58 in 2020
63 in 2021
68 in 2022
73 in 2023

Totaling 317 cents. At 33% tax I'm left with 212 cents.

So in total I can expect to have $23.52 plus $2.12 in earnings ($25.64). If I back date that 5 years at 15% I want to pay no more than $12.75 to earn 15% return per year for 5 years. As current earnings are $1 in this pretend example, I want to pay 12.75 P/E or less.

There is margin or error of course, maybe I was a bit presumptuous in my 8% growth, or maybe the P/E won't ever get up to 16 again, or maybe the dividend will drop down to 30% payout for example, so you can build that in. My 'intrinsic value' is $12.75 but maybe I want a 20% margin of safety so I buy at ($12.75 X 0.8 = $10.20) or less.

But now I just invest in index funds. Much simpler! Good luck.