Help with Graham's Intrinsic Value Formula

This is a discussion on Help with Graham's Intrinsic Value Formula within the General Trading Chat forums, part of the Reception category; I have been re-reading through The Intelligent Investor for the past few days and I came accross Graham's infamous Intrinsic ...

Reply
 
LinkBack Thread Tools Search this Thread
Old Aug 8, 2008, 5:56pm   #1
 
5 Posts
Joined Aug 2008
Help with Graham's Intrinsic Value Formula

I have been re-reading through The Intelligent Investor for the past few days and I came accross Graham's infamous Intrinsic Value Formula. For those of you who don't know it, it is as follows:

Intrinsic Value= (Normal) Earnings x (8.5 plus twice the expected annual growth rate)

One of the examples Graham points out in a chart is Xerox. Via this formula Graham shows Xerox with an estimated annual growth rate of 32.4% in 1963. For the life of me I can not figure out how he came to this figure. Graham supplies a chart which shows Xerox, in 1963, of having a P/E ratio of 25 and EPS of $.38.

Can anyone shed some light on how graham figured out the Projected Growth Rate? If you have the book, this formula and chart is on pg.295-296(4th revised edition, edited by Jason Zweig)

And just to verify, when Graham refers to "Annual Growth Rate" that is in relation to the Earnings per share, correct?

Where am I going wrong :S?!

Thank you everyone!

Last edited by Veneratio; Aug 8, 2008 at 7:37pm.
Veneratio is offline   Reply With Quote
Old Aug 8, 2008, 7:00pm   #2
Joined Feb 2008
I'm not familiar with the Graham book, but I think part of the problem is either there are some typos in your numbers or you've miskeyed your calculator.

Quote:
In his chart he shows Xerox of earning $.38 in 1963 and $2.08 in 1969. That is a 223% increase, meaning over 6 years it would be an Annual growth of 37.16%. However, in the chart it shows the Actual annual growth as 29.2%
1) $0.38 to $2.08 is not a 223% increase, it's a 447% increase.

2) To get from 223% over 6 years to the annual growth rate of 37.16%, you've just divided by 6 and forgotten about the compounding.

3) Taking the correct 447% increase, the compounded annual growth is...

(1 + 4.47) ^ (1/6) = 1.327

ie an annual growth rate of 32.7%, which ties in reasonably well with the 32.4% you quote at the beginning. The difference is probably rounding error somewhere.

I can't see where they get the 29.2% growth from either, though. Good luck!
M20J is offline   Reply With Quote
Old Aug 8, 2008, 7:41pm   #3
 
5 Posts
Joined Aug 2008
Veneratio started this thread Sorry for the typo, I meant to put 447 %.

32.4% growth is the projected growth rate, 29.2% is the actual growth rate in that 6 years. However, looking at the earnings in 1963($.38) and the earnings provided in 1969($2.08) the actual annual growth rate is different than the book has in its chart which is 29.2%.

Maybe their definition of Annual growth is slightly different?
Veneratio is offline   Reply With Quote
Reply

« s&p mini | s&p »
Thread Tools Search this Thread
Search this Thread:

Advanced Search

Similar Threads
Thread Thread Starter Forum Replies Last Post
Fundamentals-intrinsic stock value-what valuation methods really work? vergis92 Economic & Fundamental Analysis 7 Mar 26, 2009 11:45am
Here's the 20/20 bar formula that I used botelho64 Trading Software 4 Feb 24, 2008 5:06pm
Formula 1 Chicken Curry The Foyer 24 Dec 5, 2007 9:10am
Intrinsic value can't go negative? zzaxx99 Futures & Options 5 Nov 2, 2004 11:18am
HELP! DDE Formula oatman Techies Corner 46 Sep 25, 2003 3:13pm

Currently Active Users Viewing This Thread: 1 (0 members and 1 guests)