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 investments.

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%).

What If:

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.