I'll take on that Forbes guy about what he says is Ben Graham's formula.
That's not the formula I see in my copy of "Intelligent Investor" (p. 158. '73 edit.) There's no factor. (i.e. 4.4 divided by some bond rate number)
The Value is based on current or normal earnings, according to Dr. Graham. So imo, even if we're close to being in year 2002, the earnings figure for the example PFE ought to be 1.31 (est. '01) not the Fool's 1.59 (est. for yr. ending 12/'02). I wouldn't be surprised if an argument were made that even the '01 figure is too much of an estimate.
I don't get the four caveats the Fool says Dr. Graham provided. Number 3, for example, "Eliminate all firms with share prices above net working capital per share." That eliminates so many firms, including the Fool's own aforementioned PFE.
(I show PFE with current assets - current lia. = $7.6B. And a market cap. of $266B.)
It's too bad, Dr. Graham can't speak for himself. Unless he had changed his ideas over the past 25 years, I'd guess he wouldn't want the bulk of his teachings to be boiled down to a formula that so heavily uses projections of future earnings and earnings growth rates.
Also, the Fool didn't go quite far enough, imo. Because they left out an important warning. That is, PFE is trading at $42-$42.50 and the formula gives $52 as PFE's value. "If you were to take this as gospel (and you better not), you might conclude that the stock is about 25% undervalued at current prices." It's not so much that the value might be or might not be $52 or that PFE is undervalued. For many readers of the article it's at what amount under 52 could the stock be considered a buy by Graham's methods? (The article "hints?/implies? that it might/(might not?) be the current price.)
For Dr. Graham's enterprising investor (as compared to his defensive investor), Dr. Graham says, (p. 91, '73 edit.)"...the enterprising investor is to buy them only when obtainable at bargain prices - which we define as prices not more than two-thirds of the appraisal value of the securities." So, PFE could be considered a buy only under about $35/sh. For the defensive investor (p.55) maybe $26 (p/e 20 on a generous 1.31.)
Of course nobody is going to buy based on what some Fool says somebody else said. I'm just saying undervalued doesn't mean buy-able by Dr. Graham's methods, and it would've been nice if the author had made such a qualification.
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Not disagreeing that WM could be a buy here. I'm holding on to my small position. (My opinion on PFE is that it was fully-valued at 43 when I sold it last year.)
Let's see. Assuming you used the Fool's formula, you'd have plugged in $3.96/sh earnings ('02) est. And if you used the Fools other numbers too, then solving for the growth rate - I get about 10% that you must have used. If I plug that 10% into the Graham model I see in my book, (I'll use the last 4 quarters = $3.16/sh earnings), I get a value of WM = $90. I can hardly visualize that. Still, IF WM can grow earnings 10% annually, then $6+/sh. (in 7 years) at a p/e of 15 would get us there. IF this is all so, then imo, the only significant question each of us stockholders must ask of ourselves is, "How long am I going to be willing to hold this stock?"
Paul Senior |
