Value Point Analysis Model Definitions
Explanations for New Stock Edit and Input Elements
Stk Name, Sym, and Exchange:
The purpose of this entry is for the user to uniquely identify the stock to be evaluated.
For posting, it is advised that the correct stock symbol be included.
Number of Shares in Millons:
The entry for the Number of Shares is based on the number of outstanding common
shares that is used in financial reports to determine earnings per share,
dividends per share, etc. The number entered represents the number of shares in
millions; thus, 150,750,000 shares is entered as 150.75. A positive number greater
than zero must be entered.
Long-Term Debt in Millons of Dollars:
A long-term debt of say $100,350,000 is entered as 100.35. When evaluating DJIA scenarios,
the Debt to Equity Ratio is entered as .50, .75, 1.76, etc. This ratio is used with the
Book Value entry, to estimate the "aggregate" long-term debt of the DJIA Index.
Current Dividend in dollars/sh(xx.xx), annual:
The current annual dividend amount is entered as dollars per share. Thus, a
current annual dividend of $2.10 per share is entered as 2.10. For zero dividends,
0. is entered or the entry field is left blank.
Book Value or Net Worth in dollars/sh:
The book value or net worth per share entry represents the stock's current value
in dollars per share. Thus, a current book value of $15.35 per share is entered
Projected Earnings in dollars/sh, annual:
The projected earnings is entered as dollars per share, and should be viewed as
the earnings that are expected in or about a nine to twelve month time period. An
expected earnings per share of $5.10 is entered as 5.10. As changes in
expected earnings estimates occur over time, the analysis should be reevaluated
Projected Average Growth in Earnings (%):
The projected average rate of growth in earnings should be viewed as the expected trend
of earnings expressed as a percentage. This trend should represent an average of
projected earning changes over the longer term. Thus, a projected average
earnings growth rate of 12.5% is entered as 12.5; a projected decrease of 12.5% is entered
as -12.5. As changes in the projected earning growth
rate occurs over time, the analysis should be reevaluated and updated. Attention should
also be given to the possible effect any of these changes could have on the entry for
Projected Earnings ($/share) and Projected Average Growth in Sales (%). It should also
be noted that the analysis is very sensitive to earning growth rate values that are less than
the value entered for the Current Yield of AAA Bond Yields, and for the zero growth rate
Projected Average Growth in Sales (%):
The projected average rate of growth in sales should be viewed as the expected trend of
sales expressed as a percentage. This trend should represent an average of projected sales
changes over the longer term. Thus, a projected 8.5% average sales rate of change is
entered as 8.5. As changes in the projected sales growth rate occurs over time, attention
should be given to the possible effect any of these changes could have on the entry for
Projected Average Growth in Earnings (%). It should be noted that the Value Point calculation can become very sensitive when the entry for the earnings growth rate is less than the value entered for the Current Yield of AAA Bonds and the entry for sales growth rate is only slightly greater or less than the value entered for the Current Yield of AAA Bonds.
Current Yield of AAA Bonds:
The current AAA bond yield is entered as a percentage. Thus, if the current yield of the
S&P AAA corporate bond index is 7.02%, then 7.02 would be entered. This entry
represents a low risk reference rate of return factor that the model uses with the projected
earnings, projected earnings rate of growth, current dividend and other factors to
determine the stock's intrinsic value, its Value Point. The S&P AAA corporate bond index or
any equivalent high quality corporate bond index is acceptable. The model is very sensitive to
situations where the entry value of the projected earnings rate of growth is less than that of the AAA bond yield, and the entry value for the sales rate of growth is also less than, or slightly greater than the AAA bond yield. The number entered for the AAA bond yield must be greater than zero.
Projected Change of AAA Bonds(%):
The projected change of AAA bond yields, or any high grade corporate bond index, is entered as the difference in yield between the
current yield and the projected yield. Thus, if the current yield is 7.02% and is
forecasted to increase to 7.08%, then 0.06 would be entered. If the current 7.02% yield is
forecasted to decrease to 6.94%, then -0.08 would be entered.
Current Earnings in dollars/sh, annual amount:
The current earnings entry is entered as dollars per share. A current earnings per share of
$4.35, is entered as 4.35. This entry is not used in calculating the stock's Value Point. Its
only use is in the output report to show the current price to earnings ratio (CURR.P/E).
Current Price in dollars/sh:
The current price entry is entered as dollars per share. A current price per share of $54.35
is entered as 54.35. This entry is not used in calculating the stock's Value Point. Its only
use is in the output report to show the current price to earnings ratio (CURR.P/E), and
the calculated Value Point to current price ratio (VAL PT./CURR.PR.)
Number of Years the Earnings Growth Rate is Expected to be Sustained:
The number of years that the projected average rate of growth in earnings is expected to
be sustained, is entered as any number equal to or greater than one. For conservative and
base case evaluations, it is appropriate to assume a one-year projection period. Thus, the
number 1.0 or 1 would be entered. For situations where the current price of the stock
appears to have discounted future earnings beyond one year, it would be interesting for
the evaluator to explore several yearly time periods, e.g. for a one and a half year
projection, 1.5 would be entered, for a two year projection, 2 would be entered, etc.
It is important to note that this entry, "Number of Years the Earnings Rate of Growth is
Expected to be Sustained", controls the effect that the "Projected Average Growth in Earnings"
entry has on the model's calculation of future earnings (beyond one year). Thus, the greater the
value that is entered for the number of years of sustained earnings growth, the greater the
uncertainty and risk that is associated with the calculated Value Point.
For situations where the projected earnings entry is positive and greater than the
current earnings and where the sustainable earnings growth rate is greater than the current
yield for high quality corporate bonds, then a good base case entry for the "Number of Years" input
would be the sustainable earnings growth rate divided by the bond yield. If the resulting
evaluation has a risk factor that is greater than one, then consider reducing the value for the
"Number of Years" input to where the resulting evaluation has a risk factor that is close
to or less than one.
Explanations for Output Elements
The Value Point in dollars per share, is the stock's calculated intrinsic worth
or value based on the stock's fundamental input factors and supporting information
at the time of evaluation, with input factors relating to the general condition of the money market. The Value Point is very sensitive to values of "Projected Average Growth in Earnings" that are near to or less than the value entered for the "Current Yield of AAA Bonds". The Value Point is also very sensitive to values of "Projected Average Growth in Sales" that vary near the value of the bond entry, when the growth in earnings entry is less than that of the bond entry.
Projected P/E Ratio:
The projected price/earnings ratio, is the ratio of the stock's calculated
Value Point dividend by the input entry for the projected earnings.
Value Point/Current Price Ratio:
The value point/current price ratio, is the ratio of the stock's calculated
Value Point dividend by the input entry for the current price.
Current Price/Earnings Ratio:
The current price/earnings ratio, is the ratio of the input entries for
the stock's current price and the current earnings.
For dividend yielding stocks, the current yield is the ratio of the
stock's input entries for the current annual dividend divided by its current
price and expressed as a percentage.
Relative Risk Factor (RRF):
The RRF is defined as the ratio of projected p/e to current p/e. As a measure of relative risk, the RRF is primarily an indicator of the riskiness of the input assumptions used in calculating the Value Point price. Stocks that have Value Points with reasonable low risk input assumptions usually have RRF's that are less than, or not much greater than one. Note, that a zero RRF indicates that one or both p/e ratios have zero or negative earnings and therefore, is not applicable.
Stocks that have Value Points indicating good current price growth potential with reasonable risk characteristics should satisfy the following three criteria:
1- The VP/Curr.Pr. ratio should obviously be greater than one.
2- The RRF ratio should be less than, or not much greater than one.
3- The stock's current p/e ratio should reflect a value that is consistent with a reasonable projected average earnings rate of growth.
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