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Subject:  Re: What's Your Portfolio's PIV-ER? Date:  1/29/2007  12:18 PM
Author:  hheiserman Number:  1264 of 1817


My Real Money column has a chart, which I did not provide above because I do not know how to copy/paste graphics on these discussion boards.

If it helps, a reader on another discussion asked about AAP. Here are my comments. See if you can recreate the math. I assume readers know how to "grow" EPS at a specified growth rate, calculate operating values in the post-forecast period, and how to do present value calculations. If not, check out the spreadsheets in Aswarth Damodaran's website, which a Google search will point you to. He has lots of spreadsheets, and you should find what you need there.


EPS is $2.18, and the High growth rate is 15% for the next 5 years. So the Medium growth rate is 75% of the High, or 11.3%. Low growth is 50% of the high, or 7.5%. So EPS five years from now for the Low, Medium, and High is $3.13, $3.71, and $4.38, respectively.

Now, years 6-10. To be conservative, we assume growth here is 50% of years 1-5. So our Low, Medium, and High growth rates are 3.8%, 5.6%, and 7.5% a year. Imputed EPS 10 years from now is $3.76, $4.88, and $6.29 for Low, Medium, and High.

Terminal value beginning in year 11 is 3% a year.

Now we estimate intrinsic value. We start with book value, which is $9.41 per share. Then we add the present value of EPS from years 1-10 (forecast period), and also the present value of EPS beginning in year 11 (post-forecast period). I use a 10% discount rate. You may think 10% is too low, that, say, 11-12% (or higher) is more appropriate. I do not object. But I use 10% for all companies because I want to compare them as economic equals. Once I get to know the business better, I may go back and adjust the discount rate.

Per-share intrinsic values are $49, $59, and $70, based on the above assumptions. The weighted average intrinsic value is $58, based upon 40% for the Low, 35% for the Medium, and 25% for the High forecast.

At $38, AAP's PIV is 66%. Its expected return is 52%.

For an exceptional company (Earnings Power Staircase, durable competitive advantage), you might decide to buy at a maximum PIV of 75%, or $43. You might also decide to sell if the PIV is over 125%, or $72.

For a run-of-the-mill company (upper-right box of the Earnings Power Chart in 4 of the last 5 years but no staircase, no competitive advantage) you may decide to pay no more than 60% of intrinsic value, and then sell at 100%.

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