Tag Archives: Valuation

An Introduction to Stock Valuation

I have put together an overview of how stocks are valued using fundamental valuation methods.

How to value stocks

PDF version of this ebook: An Introduction to Stock Valuation

To run a valuation on a company try it here Get a valuation report

Background:

“Risk comes from not knowing what you are doing.” – Warren Buffet

Buying stocks without understanding their value is like buying a (car, set of golf clubs, vacation) without asking the (price, model, location) first. How do you know you are getting a good deal if you don’t know the value?

This e-book is an overview of valuation. Its purpose is to help you understand how to value stocks. Picking stocks, once you know this, is an easier process as it gives you a level of confidence that you are purchasing stocks that have a value you have determined based on the risks you understand.

The material can be a bit dry at times; we’ll try and keep it light.

Who should read this book?
This book is an introduction to valuation so there is some level of understanding that will be needed (and can easily be obtained). The book is of value:
– If you are investing but are not sure how the stocks you own are valued
– If you are aware of financial statements, may recognize Revenue and Net Income but not much else and want to expand that knowledge as it pertains to the Stock Market

There are many other parts to understanding what stocks to buy (or sell) and we will cover some of those in future editions, specifically analyzing a company’s financial statements and ratios to understand what risks we need to be aware of (does the company have too much debt compared to its industry, does the company face a liquidity crunch in its short term financing…) We do touch on ratios here and introduce some limited financial statement analysis.

About the Author:
Brian is the President of StockCalc (www.stockcalc.com) a fundamental valuation website for retail Investors and Investment Advisors. Brian is a Chartered Business Valuator (CBV), a Canadian valuation designation (www.cicbv.ca)

The full PDF version is available here – no email required. Feedback is very much appreciated.

PDF version of this ebook: An Introduction to Stock Valuation

Value a Stock in 4 Easy Steps

Determining what a stock is worth does not have to be a complicated process if you have the right tools to help you.  There are 4 steps to generating a valuation using the Stockcalc website. www.stockcalc.com

In the last blog we outlined the process involved
https://www.stockcalc.com/blog/BrianD/2015/12/21/how-to-calculate-what-a-stock-is-worth/

In this we will dig a little more into the 4 steps:  I am using the Stockcalc website to do these calculations and for full disclose am company President.

The 4 Steps (once you have selected a company)
1)  Determine what the cost is for the funds needed to run and grow the business. We call this the Weighted Average Cost of Capital or WACC.   Large, stable companies have a lower WACC than more speculative companies.
2) Forecast the company’s financials into the future based on assumptions you have or are able to get from Analysts that cover the company. We have a number of forecasting tools on the site starting with Analyst forecasts and Growth projections all the way to using a blank page and creating the forecast yourself.
3) Value the company using Valuation models such as a Discounted Cash Flow (DCF) where you include the financial forecasts, WACC and other calculations and assumptions such as Capital Expenditures needed and Debt levels.  The site has a full DCF framework for you to calculate with and auto-populates each cell to get you started.
4) Test your assumptions, see how sensitive the company is to the inputs.  Testing your assumptions is a critical part of valuation work. When you get a different valuation than you see a company is trading for on the stock exchange you need to ask why, and test. You may have uncovered an opportunity.

Here is a valuation I recently did for Lowes Companies Inc. using this 4 step process.
https://www.stockcalc.com/blog/BrianD/2015/12/21/lowes-companies-inc-low-fundamental-valuation-using-analyst-forecast-data/

And here is the process explained on Video for Alphabet (GOOG)
https://www.youtube.com/watch?v=V5194KeW_d0

Valuation is part art, part science.  The assumptions you make impact the company’s value.  For example, if you think the WACC is 8% instead of 9% the company will calculate to be more valuable because its cost to service its capital will be lower.

Here is a tool you can use for free to quickly test your assumptions :
www.stockcalc.com/dcf.aspx
Simply load a symbol or name into the Symbol text box and select the company from the dropdown.  Test the valuation by changing the growth rates, WACC, Free Cash Flows etc.

Next Steps:
If you are not sure where to begin you can select a company you are familiar with (GOOG, AAPL) and work though the steps above on the Stockcalc site.   Each of these steps are found on the Research Page which you can access either by clicking the Research Button   or selecting Research from the dropdown menu next to the Stockcalc logo (both are on the Dashboard)

About Stockcalc:
If you would like to explore the Stockcalc website and quickly run valuations like  simply create an account at www.stockcalc.com  (Start with a 14 day free trial)  Use the walk-throughs (click the walking man icon), videos (video icon on each page) or the help menu to help navigate the site. The site has a number of tools for data query, backtesting,  forecasting and valuation.  We have a no restrictions  Stockcalc 14 Day Free Trial available as well.
If you would like the above valuation to test simply send us a note from Stockcalc’s “Contact Us” on the dashboard.

 

 

How sensitive are companies to rising interest rates?

The talk of will they or won’t they raise rates has been ongoing for more than 2 years now.  We have to expect either rates get raised at some point, we stumble along on the current path or we end up in deflationary times.  I want to explore the more optimistic of these scenarios and its impact on stock valuations: the economy improves and rates start to rise.

To look at this in detail I am using www.stockcalc.com  (Disclaimer: I am the President of Patchell Brook Equity Analytics and we created Stockcalc.com precisely for this type of analysis and valuation)

I will examine Caterpillar as it has with a 59/41 Equity to Debt in the Capital Structure

Using Stockcalc I first create and save a WACC for CAT:  (Research Menu, Valuation, WACC).  Stockcalc does a first pass on WACC using default values which results in a WACC of 8.93.

Cost of Equity (Ke) 13.63 (Using CAPM), After Tax cost of Debt : 2.17, 59% Equity, 41% Debt

 

WACC for CAT

Next I load the Quick DCF tool  so I can run the analysis (Research, Forecast, Analyst) (Note – the quick DCF is a testing and teaching tool, the other tools are more detailed in their analysis)

It is available for free at www.stockcalc.com/dcf.aspx or inside the Stockcalc.Com website

Quick DCF for CAT

Value Per Share ($) Calculations for Caterpillar (CAT:NYS) using the Quick DCF tool on Stockcalc.com

Each change in WACC (8.93 – 9.34 – 9.75) implies a 1 % change in Cost of Debt.  Growth rates are next 3 years and thereafter (5% and 3% in the first row for ex)

WACC 8.93 9.34 9.75
Growth rates 5,3% 70.02 61.28 53.60
Growth rates 6,4% 97.40 84.92 74.21
Growth rates 4,2% 50.55 44.08 38.30

(Current Price at the time of valuation (October 2015) was $69.34)

A 1% change in the Cost of Debt results in a 12.5% change in value per share.  A 1% change in Growth rates results in a 28% change in Value per Share.  A 1% change in WACC results in a similar 28% change in Value per Share.

Message: if interest rates are rising, growth prospects need to be rising at half the rate to keep this share price holding steady.

 

If you want to explore the Stockcalc software simply create an account at www.stockcalc.com and have a look around.  Use the walk-throughs (click the walking man icon), videos (video icon on each page) and  help menu to understand and navigate the site.  The site contains a number of tools including screens, queries, backtests, forecasts and a variety of valuation methods.