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I was looking at the interesting spreadsheet calculating the intrinsic value. My initial impression was that the premium paid for future growth was very low. After closer examination, I think that G used in the formula should be whole numbers, i.e if the growth rate is 10%, 10 should be used not 0.10. If 0.10 is used, the value obtained is often too close to 8.5P/E.

ReplyDeleteMy interpretation of the formula is that 8.5 represents the base P/E ratio that an investor is willing to pay for a zero-growth company.

Say STEngg has an average EPS of 0.1378 and average growth rate of 10%, so the formula will be 0.1378*(8.5 + 0.2). I'll be paying 0.2*0.1378 =0.02756 for 10% growth rate as compared to ~1.1 for a 0% growth rate. That's where I think the values seem odd!

Hi,

ReplyDeleteJust to make sure we know what you mean...are you refering that the intrinsic value of STENG should then be

0.1378*(8.5 + 2(10.6)) = $4.09 if the growth rate of 10.6% instead of 0.1 is used?

Did a google search and guess you are right...in that the formula used whole numbers.

Hmm..but then the revised calculated intrinsic values now make the prices in 2007 look really cheap!

Guess with the margin of safety of 50%...STENG should be $2.045 for Graham....

Thanks for the clarication :)

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