Yo Andrew:
> What if it's a verrrryyyy dependable slug?<g>
Nothing wrong with buying a slug. I was just reminding you of the exercise we did before - a non grower at 9% discount being worth 11x FXF, etc. You had posed the question of whether my shorter term projections would leave me hanging in a bad market; my point was merely that we'd all be hanging, and that if anything your method is more likely to result in paying a number greatly divergent from absolute value (either high or low).
> how much should you pay?
I'm going to address a slight tangent, since the "subjective" answer to the above does have a quantitative answer. You have been using 9% for a discount rate, which is rather arbitrary. To determine *intrinsic* value the discount rate should be set equal to the return one could confidently expect over an equivalent time frame. When viewing a company as a going concern, i.e. one expected to give cash flows in perpetuity, an anticipated interest rate is appropriate (long bond yield). To determine the value to the individual investor, the discount rate should be set equal to the return required by the investor. This number is subject to variation, unlike the discount rate used to determine intrinsic value, since we all may have different potentials. Perhaps you can sell coffee therapy for a 12% annual return, perhaps jbe can sell computer services for a 14% return. When you discount at 9%, you are in effect saying that you require a 9% minimum return.
> I did my estimating voodoo stuff, and created an imaginary year > about 5 years out. I calculated that imaginary year's rough FCF. I > applied a "reasonable" multiple to it.
You might want to check your figures. :-) But this is similar to what they do with the Buffett Program at S&P. After screening for profit margins, ROE, growth in capitalization, etc, they apply consensus growth rates to the trailing years FCF, to estimate FCF five years out. They then divide this number by the long bond yield (jbe - this would get you that multiple) to get a target price. If the stock is below that price, it makes the list.
I think you might enjoy reading the Parks book. He does a good job on the valuation, and also has a section on how debt affects valuation.
Pirah |
