Value Point Analysis Model Help
Explanations, Sensitivities, and Idiosyncrasies
What is Value Point Analysis:
The Value Point Analysis Model is a computer model designed to evaluate
a stock's worth in terms of its fundamental economic and financial factors,
and the general condition of the money market.
Basically, here's how it works:
After you've gathered information about the stock from your usual sources
(S&P stock reports, annual reports, research reports, whatever), the model
calculates the intrinsic worth or value of the stock, the stock's VALUE POINT,
in dollars per share.
The model determines the stock's Value Point by first calculating and
ranking intermediate values of the stock, and then finalizing the value based
on various computed ratios and factors generated from the input data and
processed by the model's logic.
These intermediate values are based on what analysts call the "fair value".
Fair value is a theoretical price for stocks given a level of interest rates and
corporate earnings. If rates fall but earnings remain the same, fair value rises,
because the return on stocks becomes more attractive relative to what you can
earn on an interest-bearing investment. Conversely, when interest rates rise,
fair value falls as stocks become less attractive. Fair value can be thought of
as the balance point where the value of stocks and bonds are equally attractive
The intermediate measures of value that compare earnings, dividends, and capitalization
to the current yield of high quality (S&P AAA) bonds, are based on the following:
- Bond yield rate of return on projected stock earnings factored by the projected rate
of earnings growth, debt to equity, and projected change in bond yield.
- Bond yield rate of return on stock dividends.
- Book value or net worth.
- Total capitalization.
Type of data and inputs required:
The input factors required by the model fall into two categories;
factors related to a specific stock and factors related to the monetary market.
Specific Stock Factors -
- Number of shares in millions.
- Long term debt in millions of dollars.
- Current dividend $/share.
- Book value or networth $/share.
- Projected earnings $/share.
- Projected average growth rate of earnings - percent.
- Projected average growth rate of sales - percent.
- Current earnings $/share.
- Current price $/share. (The last two factors are not
used in calculating the stock's Value Point. They are
used in the output report to give current P/E and
Value Point/Price ratios.)
- Number of years the earnings growth rate is expected to be
sustained, e.g. 1, or 1.5, or 2, etc.
Monetary Market Factors -
- Current yield of AAA Bonds - percent.
- Projected change of AAA Bonds - percent (100 basis pts. = 1%).
By continuously adjusting the input factors (keeping in mind, a change in
projected earnings may imply a change in earnings rate of growth), the Model
will constantly reevaluate the stock's intrinsic worth or Value Point.
Model Sensitivities and Idiosyncrasies to keep in mind:
Attention should be given to situations where the input values for the
earnings rate of growth and the yield for AAA Bonds fluctuate around each
other; also for stocks that historically yield dividends, a zero dividend
input may give a higher Value Point than a near zero dividend input. These
zero and near zero idiosyncrasies can also occur for the Projected earnings
and the Projected earnings rate of growth input factors. For these cases
the lower Value Point should be used.
Some Concluding Comments:
The input factors that are required for performing a fundamental analysis
relate and interact with each other in a very complex way. They should not be
varied over a large range in isolation from each other.