My definition of intrinsic value boils down to “a wonderful company fairly valued”. In previous posts I defined 14 value elements that describe what I mean by “a wonderful company fairly valued”. Now I’m looking for a better, simpler way to present the value elements & the way I use them.
The 14 Elements Value Elements Are:
(1) Strong Cash Flow
(2) Strong Earnings Growth
(3) Dividend Consistency
(4) Consistent Dividend Increases
(6) The Formula: E(2R+8.5)*Y/4 = Intrinsic Value per share
(7) Good returns on equity
(8) Little or No Debt
(9) Business Model I Understand
(10) A Durable Competitive Advantage
(11) Measure Risk
(12) Reliable Long term Dividend Income Stream
(13) Increasing Annual Dividends Faster Than Inflation
(14) Expect at least a 9% Total Return Compounded Annually
I use a three level hierarchy to test each stock; in my previous post I explained the 1st Level.
When a stock passes the 1st Level I collect more data and test it at the 2nd Level and if it passes that test I collect still more data and test it at the 3rd Level. Those that pass the 3rd Level I buy.
Collecting 2nd Level Data
The additional data needed for 2nd Level analysis begins with the current market price. I get the price and nearly all the rest of the 2nd Level data from the MSN Money/Investing/Stocks web site. The price comes from the landing page in the upper left quadrant. Today, For Abbott Laboratories (ABT), the closing price was $48.63 per share. I enter the price and today’s date in the 2nd Level tab of my stock analysis Excel workbook.
Next I go to the company’s Income Statement by pressing first the “Financial Results” link & then the “Statements” link.
This page, labeled “Abbott Laboratories: Financial Statement”, displays the Income Statement for the previous five years. I then enter the most recent “Total Revenue” number and the earliest “Total Revenue” number in the 2nd Level tab as a calculation; = (newest total revenue)/(oldest total revenue) to calculate the Revenue Growth Ratio.
I scroll down to the “Net Income” line and enter a similar calculation;
= (newest net income)/(oldest net income) as the Net Income Growth Ratio. I scroll down further and pick up the oldest value of “Dividends per Share - Common Stock Primary Issue” and enter it in the “5th Year Dividend” field of the 2nd Level tab. For foreign stocks and ADR’s you must make sure the figures are compatible. Sometimes, the “Primary Issue” is denominated in another currency and sometimes ADR’s are not one for one with the original stock shares. For example, you might find an ADR that represents two original shares; in this case the value of the dividends paid five years ago must be divided by two to make it compatible with the current dividend per share recorded in the 1st Level tab. Because of this problem and the currency problem I generally get the five year old dividend from a five year price chart with dividends displayed.
Then, I enter today’s date to indicate the age of the income statement data. I also go to the Company Report page and record the company’s home country. The “Company Report” link is in the upper left quadrant of most pages in this web site.
The last bit of data needed for the 2nd Level analysis is the current yield on ten year Treasury Bonds (“10-Yr Bond”). This bit is available on the Yahoo! Finance/Investing page as part of the “Market Summary” in the upper left quadrant. I refresh the Treasury bond figure about once a month and use the same figure to analyze all stocks between refreshes.
When the data is entered calculations happen automatically. However, if I’m adding a new stock ticker to the tab I must also add the ticker in two other tabs and copy formulas to the new rows headed by the new ticker. The three tabs are interlinked with each other and with the 1st Level analysis tab.
Next I’ll summarize the calculations performed.
Link to Other Topics in the Get Rich Slowly Report: What Is Intrinsic Value?