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Strategies & Market Trends : Gorilla and King Portfolio Candidates
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To: Mike Buckley who wrote (35786)12/1/2000 5:38:48 PM
From: Brian K Crawford  Read Replies (1) of 54805
 
Mike:

<<...the discounted cash flow (DCF) analysis which by the way is at the core of Moore's valuation thesis. But our own John DelVecchio who also happens to be on the Fool's staff will soon present a DCF spreadsheet that -- voila! -- all we have to do is fill in the blanks.>>

While John works on his solution, there is a DCF calculator at Quicken's website.

quicken.com

The model requires 3 inputs
1. Current annual earnings in dollars (not earnings per share)
2. Estimated long term earnings growth rate
3. Desired discount rate

When you get to the site, plug in your symbol, and select "Intrinsic Value". The model will supply the initial numbers for current earnings, estimated growth rate, and discount rate. You can override any of these, and then recalculate.

Note: Plug in your best reasonable guess on earnings growth. Then play with the discount rate until you hit the one that causes the model to return a "Fairly Valued" result at today's stock price. That discount rate is what you might expect to earn annually as a long-term buy and hold stockholder.

WARNINGS:

1. The model uses earnings from a database that does not exclude extraordinary charges. The fix I employ is to obtain analyst EPS estimates from the tab labeled "Analyst Ratings" (These typically are normalized to exclude oddball charges) and then multiply these EPS estimates times the number of shares outstanding to get base earnings in dollars. The model supplies you with the number of shares outstanding in the results section titled "Walk Through".

2. If the company has negative current period earnings, the model can't handle compounding a negative to a positive.

3. The model uses the estimated growth rate to compound earnings for TEN YEARS. After ten years it assumes a 6% continuing growth rate. Ten years is a long time, and most hypergrowth companies that are doing 50% or 100% growth won't be able to keep it up for ten years. Be reasonable with this growth estimate. You can get analysts 5 year growth estimates at the same site under the tab "Analysts Ratings".

4. Never forget: Garbage in, garbage out

You will be surprised at how many companies come back with results that are fairly valued at 15-20% discount rates. Especially the mature and recognized leaders.

Brian
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