Read here on what Warren Buffet say about such people.
Benjamin Graham came up with a simple rule of thumb formula to find the intrinsic value of a stock. (Seriously, don't ask us how its derived...its baffling! )
Intrinsic Value per share= Current ( Normal) Earnings per share X (8.5 + twice the expected annual growth rate of earnings per share)
Take note that (Normal ) means one-off , extraordinary items that inflate or deflate the earning for that year are excluded. These extraordinary items refers to, for example, currency gains, sale of property ( non-property company), or anything that is earned/loss from activities not in the normal course of a company's business. The expected annual growth rate of earnings is the growth expected over the next 7 to 10 years.
Let's use it on Singapore Airport Terminal Services shall we!
We pulled the data out from Reuters ( let's assume reuters is correct) You can get the reuters data from http://www.reuters.com/. ( thats if you believe in their data!) Look at Diluted EPS Excluding ExtraOrd Items. Note that we use Diluted EPS instead of Basic EPS as the former is a more accurate reflection on the ownership of a company. Read here for a better explanation.
This data has already excluded extra-ordinary items therefore it is "normal".
Expected Annual Growth rate of SATS earnings per share = 0! ( based on the above. It might be negative too.. but let's be good shall we! This is up to your assumptions. Garbage in Garbage out!)
Current (Normal) Earnings per share = 0.179
Intrinsic Value per share = 0.179 X ( 8.5 + 0) = $1.512
Current value now as of 24 Nov 2008 = $1.37
Wow...let's go chiong and buy! Wait. Benjamin Graham also mentioned about the Margin of Safety! So is $1.512 - $1.37 = $0.142 a good discount and sufficient as a Margin of Safety?? Use your own judgement!.
As Graham once wrote: " You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."
(Updated 25 Nov 2008, on a commenter's comments on using the weighted average of earnings per share for 3 years instead of just the most recent year's earnings per share, we thought about it, and we think it actually makes sense to use a weighted average, as some industries are highly cyclical. A weighted average will smooth earnings out through the years. Hmm maybe a simple average will suffice to keep it simple.... )