Malcolm, there are some things you can do to improve your approach, I think. I'll mention the use of free cash flow instead of earnings, and let that go, but even with the use of earnings, you can improve your model. First, it is probably overly optimistic to assume a high growth rate for that long. A more conservative, and often used approach, is to use two or three stages, e.g., assume 20% growth for 5 years, 10% growth for 5 years, 5% growth thereafter (numbers just for illustration). Second, market participants go to extremes in how they price companies, so guessing at what they might price a company at some future time adds a source of error. Instead of guessing at the price, estimate what future earnings would be worth to you if you were the sole owner. Recognizing that the other market participants may either over or under price at any future time, this gives a way to build in a margin of safety.
- Pirah |
