Intrinsic value

jd1888

Active member
175 6
Hi all,

Looking for a few pointers here. I tried to calculate Apples (aapl) intrinsic value using Benjamin Graham’s formula.

IV = EPS x (8.5 +2g) x 4.4 / Y


IV = Intrinsic Value
EPS = Diluted Earnings Per Share
8.5 = Fair Price to Earnings Ratio for No Growth Company
(This implies a 11.76% earnings yield)
G = Conservatively estimated growth in EPS for the next 7 to 10 years
4.4 = The average yield for high grade corporate bonds in 1962 when the model was introduced
Y = The Current Yield on AAA Rated Corporate Bonds

The IV I came up with is $2160.70

Using these figures: #
EPS 44.11 2012 estimate with one quarter to go. Source CNBC
8.5 the standard as above.
G being 16.3, I came up with this figure by
averaging the the EPS growth from 2006 to 2012 then dividing by 4 then * by 2 as the formula asks.
The 4.4 I changed to 2.92.
Y being 2.45 the yield for Mobil Corporation bonds 7 to 10 year maturity.

Now my questions are:

Do I have this worked out correctly?
If so doesn't the figure in red seem rather crazy and ridiculous?
Or is it completely achievable and if so how?
 

scose-no-doubt

Veteren member
4,630 954
Get your sigmas out and randomise your inputs between one historical SD over x period with a log based growth input as apple doesn't really have too many move markets to expand into. Also look for a tech based AAA note rather than an unrelated industry which is priced on different fundamental factors. Monte Carlo it and plot the distribution of results.
What you'll see is that these kind of overly simplistic calculations are worth balls all as they provide 0 clarity on anything.

There's a reason that big business spends literally billions per annum on due diligence for single companies and even then...

I watch a program on chaos theory last night that really drive this point home.
 
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Reactions: the hare

jd1888

Active member
175 6
Get your sigmas out and randomise your inputs between one historical SD over x period with a log based growth input as apple doesn't really have too many move markets to expand into. Also look for a tech based AAA note rather than an unrelated industry which is priced on different fundamental factors. Monte Carlo it and plot the distribution of results.
What you'll see is that these kind of overly simplistic calculations are worth balls all as they provide 0 clarity on anything.

There's a reason that big business spends literally billions per annum on due diligence for single companies and even then...

I watch a program on chaos theory last night that really drive this point home.


Thanks for the reply but some of what you have said there has went right over my head, any chance you could put that in laymans terms?
 

scose-no-doubt

Veteren member
4,630 954
In laymans terms... outside of bonds, these kinds of calculations are absolutely and completely useless on their own.
 

Just4Fun

Junior member
45 1
Hi all,

Looking for a few pointers here. I tried to calculate Apples (aapl) intrinsic value using Benjamin Graham’s formula.

IV = EPS x (8.5 +2g) x 4.4 / Y


IV = Intrinsic Value
EPS = Diluted Earnings Per Share
8.5 = Fair Price to Earnings Ratio for No Growth Company
(This implies a 11.76% earnings yield)
G = Conservatively estimated growth in EPS for the next 7 to 10 years
4.4 = The average yield for high grade corporate bonds in 1962 when the model was introduced
Y = The Current Yield on AAA Rated Corporate Bonds

The IV I came up with is $2160.70

Using these figures: #
EPS 44.11 2012 estimate with one quarter to go. Source CNBC
8.5 the standard as above.
G being 16.3, I came up with this figure by
averaging the the EPS growth from 2006 to 2012 then dividing by 4 then * by 2 as the formula asks.
The 4.4 I changed to 2.92.
Y being 2.45 the yield for Mobil Corporation bonds 7 to 10 year maturity.

Now my questions are:

Do I have this worked out correctly?
If so doesn't the figure in red seem rather crazy and ridiculous?
Or is it completely achievable and if so how?

Why so tortured and complicated ?
Why not go the NPV route ? Much easier.
 
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Reactions: rsh01

DionysusToast

Legendary member
5,963 1,501
I remember doing all this...

Your fundamental issue is that price and intrinsic value don't ever need to come back in line. If you plan to calculate value and then look to buy at a discount, you are in for somewhat of a disappointment.

Value really comes down to what people collectively think something is worth. Trying to outsmart the masses in the value game isn't necessarily a good idea. Looking at the market is more likely to tell you where people perceive value than looking at calculations like this.

If this is your thing. Have you looked at companies being brought out & valuing the non cash incentives to current shareholders? Probably more opportunity there.
 
Last edited:

DionysusToast

Legendary member
5,963 1,501
Get your sigmas out and randomise your inputs between one historical SD over x period with a log based growth input as apple doesn't really have too many move markets to expand into. Also look for a tech based AAA note rather than an unrelated industry which is priced on different fundamental factors. Monte Carlo it and plot the distribution of results.
What you'll see is that these kind of overly simplistic calculations are worth balls all as they provide 0 clarity on anything.

There's a reason that big business spends literally billions per annum on due diligence for single companies and even then...

I watch a program on chaos theory last night that ureally drive this point home.

Why does this post remind me of the opening scene in Macbeth?
 
 
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