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RetireFoolishly,

Your welcome and good catch.

No change to Wal-Mart's High intrinsic value estimate of $84 or its weighted average intrinsic value of $71. But the forecast period and terminal period values do change, as you correctly point out.

PV operating value (Years 1-10) should be $30, not $49. The corrected PV terminal value (years 11-eternity) now stands at $40, not $21. Book remains the same, at $14. So add it all up and High intrinsic value remains at $84, as mentioned above. Crucially, there are no changes to the “drive-by” weighted average intrinsic value estimates for Wal-Mart or any other company I have mentioned on this or other discussion boards.

The snafu which you caught is because my spreadsheet forecast period covers 20 years, with terminal beginning in year 21. This longer period explains why operating value in my Real Money column is higher than yours (and also why my terminal value is lower than your estimate.) Not every company is going to grow at 3% beginning in year 11, and I want my SS flexible enough so it can value companies that can grow at an above rate for longer than a decade. But these pearls are few and far between. Just flip through a Value Line report and see how few grow staircase-like for more than a few years. Not many! Indeed, most companies experience what British economist I.M. D. Little calls “higgledy-piggledy growth.”

In an earlier post I mentioned the importance of checking all derivative numbers against the 10-K and 10-Q. The Wal-Mart example shows why. Yahoo says EPS is $2.62 a share. But when you divide TTM earnings of $11.68 billion by 4.17 billion shares, you get $2.80 a share. This is a big difference.

For this model I use TTM earnings and then divide by diluted shares outstanding, both of which I get from the latest SEC filing. Also, something I didn't mention before in the interests of keeping things simple: if a company has a history of diluting share count, then make the appropriate adjustment in your valuation work. The more shares a company issues, the lower its intrinsic value per-share estimate.

Thanks for checking my work. My father-in-law, who was a professor of mechanical engineering at M.I.T., says he learned more from his students than they learned from him. While I do not consider any of you students—I am sure your investment results are better than mine—I do learn from you.

Speaking of investment results, I have calculated my performance for the last two years using the Matt Richards/Jim Gillies TWIRR approach, which Jim exhaustively covered on HG in December and early-January. I will provide a link to these results in a few days. Then you can decide if the Earnings Power approach (authentic earnings power, durable competitive advantage, discount to intrinsic value) helps or hurts you.


Hewitt
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