Shean... I just stumbled on this thread. Hope you're all still
around. I've been using this valuation technique for about six
months now, and it really makes sense to me.
Just an observation here:
Earnings in 1997 $100M
Expected growth rate 5%
Expected earnings in 1998 $105M
Long term bond rate 9%
Capitalisation rate 9%
Value of company in 1998 =105/0.09 = $1167M
Value of co. discounted to 1997 =1167/1.09 = $1070M
In this analysis, you assumed that this company stopped growing,
and will simply earn $105M every year from now to infinity.
The second part of Hagstrom's formula gets huge because of
this infinity (or really large number - I use 100 years). That's
why you have to use a small growth rate - A company growing
earnings at even 10% for 100 years would be massive! Of course
this lower growth rate assumption also presents one of several
opportunities for one to err on the conservative side.
I use a spreadsheet to provide me with a spectrum of valuations
based on 10-year growth rates of 0%, 5%, 8%, 10%, etc. It's
important to realize that a single calculation can give you a
false sense of precision - With appropriate assumptions, any
stock price can be justified!
Another note: this technique should be applied to "Owner Earnings",
not just net earnings. The whole rationale behind this method
is based on how much cash the owner would receive if this company
were privately held.
If anyone else is tuning in this thread, I would love to compare
notes on the application of this technique!
Regards,
Andrew |
