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How much price safety should I build into my buy price? How does its fair value compare to the value of other opportunities? At what price should I consider selling it? Is it priced as a bargain or it is greatly overpriced? We are talking about the intrinsic value per share of a stock as a measure of its worth—a value free of emotions or other biased influences. It is the value a knowledgeable owner would sell to a knowledgeable buyer.
The biasing influences one can encounter include psychology, expectations, insider information, manipulation, current events, erroneous assumptions, etc. In this article, I describe an Excel spreadsheet that I designed in order to estimate the unbiased worth of a company and, subsequently, its intrinsic value per share. This analytical tool is one way to detect mispricing. Excel model are listed at the end of this article. Depending upon the input data, the assumptions and model complexity, each method could yield a different result.
AAII’s June 2016 SI News describes valuation methods that use stock multiples. Another method uses an appraisal type of approach to estimate the worth of a company and then its intrinsic value per share. Such a model uses past company performance data, market statistics and other important economic variables to perform the calculations. When realistic data sets are used, the intrinsic valuation model is void of gut feelings, emotions and biased influences. Consequently, the data inputs that the investor uses to drive the model’s calculation engine must be carefully evaluated. Please note that if you make changes that shift the rows or cells, the cell references in this article may no longer apply.
In this article, sections of the spreadsheet are highlighted in separate figures. The graph shows how the valuation changes each year. Short descriptive headings are placed above each cell or group of cells. The heading above cells B41:B51 reads Excess Period N.
9, 10, the intrinsic value shown opposite its matching excess period is the one to use. In this Excel model, our first priority is to find the value of future annual cash flows to the firm in today’s money. Using the company’s revenue growth rate, the profits are determined next. The annual stream of FCFF money is what we call king.