Mike:
What follows is not intended as argument. I do disagree with some of what you have written, but my intent is merely to expose the valuation novices to more than one perspective. I hope you will not be offended that I use your post to illustrate differences. I hope and trust that you and others will also feel free to point out the inevitable mistakes that I will make in doing so.
As I have said in previous posts, I dislike the use of PEGs and YPEGs, favoring free cash flow. But here are some differences I have with what Mike has written, even with the use of PEG and YPEG. Mike doesn't like the use of forward earnings because is based upon an educated guess. This is true, but no matter what valuation technique one uses, one is making guesses and estimations about the future. Even those that claim to only base valuation on past results are still making assumptions about the future, namely that a stock will increase in price for some reason. Even those that perform no valuation exercise are making assumptions about the future.
Being as one must, in some form, make guesses about the future, what form should those guesses take? Here is where I would argue that attempting to estimate intrinsic value has an advantage over trying to predict price. When estimating intrinsic value, one only makes guesses about the performance of the business. When predicting price, one makes guesses about both the performance of the business and about the future valuation that investors will attribute to that performance. Again, while I dislike the use of PEGs and YPEGs, it doesn't seem consistent to criticize the YPEG because it uses a guess, and then turn around and guess both earnings some years out and a PE some years out.
Likewise, setting a PEG or YPEG as appropriate or fair only works if you have some basis for it. Being as both have tended higher in recent years, we could be looking at a changing standard, or we could be looking at a blip, a temporary change in standard. We have no way of knowing.
I also disagree with Mike about the Motley Fool's valuation guide. Its value lies in describing many of the things that people do, but that can just be confusing to the person interested in applying themselves to learning valuation. Frankly, you don't (and they don't) need a different way of valuing every different company. You need one good tool and the skill to use it well; if the tool isn't appropriate for every company, so be it - you don't need to determine the value of every company. IMO the free cash flow tool works universally, but of course other tools can work well if used correctly and rigorously.
I agree with Mike that it is not necessary to estimate intrinsic value. I would however caution those that take the approach of estimating return to use a range of expected PEs, as Mike does in his example. Don't trust in the high end!
Sorry for the thread bloat.
- Pirah |
