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Kahuna posted this link on the JNJ board:

http://www.valuepro.net/index.shtml

Just playing around with it, it seems pretty interesting. You can override inputs such as growth rate, based on BMWm omniscience. I'd be curious to hear what some of you adroit number crunchers think of it.

John
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Hi John,

I'm surprised to report (after taking just a quick look) that Valuepro's valuation tool appears to be very good.

It looks like it is following a Free Cash Flow to the Firm (FCFF) methodology.

So, provided that you understand what all those inputs mean and that they are really representative of the company you are trying to value, it should give a reasonable number.

But remember, garbage in, garbage out.

I'll look at it more and do some comparisons with a spreadsheet I trust. If I learn anything more, I'll post again.

Rich
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Hey, did I miss the announcement of the addition of the TMF to your moniker, RichDad? If so, congratulations! Is it fun?
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Hi ThyPeace,

Thank you. The name change happened a few weeks ago.

Yes, it is fun, but I'm still learning the ropes.

Rich
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If anyone can find a stock which is trading for more than the Baseline Valuation I'll buy them a beer next time they are in Melbourne.

e.g. GOOG 1190.83

my favourite is SunTech Power STP at 2413.68

love that accuracy.

Dean
May be missing the point, but the baseline output seems like total crap to me.
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my favourite is SunTech Power STP at 2413.68

I can top that. Annaly (NLY) baseline valuation at $48,312.36. Current price $13.84. When the market wakes up to this I'm rich! Woohoo! Beers for all on me.

Tom
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"If anyone can find a stock which is trading for more than the Baseline Valuation I'll buy them a beer next time they are in Melbourne." - whatismyopinion

DRL - Baseline Valuation = 0.00

Drink that beer for me...

Like all valuation calculations, its strongly dependent on the assumptions: For GOOG and STP the default growth rate is 35% over a 10 year period. That's probably not realistic.

BTW if you click on the 'Cash Flows' button it opens a window with the computation table to let you look at the year-by-year results.

If you want to do FCF valuation and you can come up with reasonable estimates for each parameters this is a really nice tool.

Scot :-)
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Hi Everyone,

One of the inputs is "Equity Risk Premium" (in the second column on the right, part way down). The default appears to be 3%, which is low, IMHO. I would suggest changing it to 5% in all cases.

If you want a stock that it finds as overvalued, try DAVE. It trades at a little over $18. Valuepro, with the default settings, says its worth $8.30. FWIW, my analysis has the value pegged at over $30, but I used an approach based on my knowledge of the company, not historical financials. (Oh whatismyoption, I'll be in Melbourne next week, keep my beer cold, thanks). <grin>

The calculator is simply taking trailing tweleve months (ttm) results and using analysts projected long term growth rates. So, to the extent ttm results is indicative of the future (probably 25% of time, i'd say) the results you get will be in the ballpark.

If you plan to use this tool, I'd recommend clicking on the name of each of the input parameters. A definition box pops up, describing what exactly the input is and what the default settings are. The links on the right of the page lead to a summary discussion of the methodology employed - something the user should understand.

For, MMM it gives a value of $103 and for JNJ a value of $96 based on default settings. If I adjust the risk premium to 5%, then I get $82 for MMM and $78 for JNJ. Those numbers are in the ballpark.

Be carefull about the growth rate being used. The growth rate needs to be the expected growth rate over the "high growth period" which defaults to 10 years. Ten years is a long time and high growth rates over 20% for that long are very rare. If analysts projected growth rates are unavailable, then it uses past results. So small companies without analysts coverage and stellar historical results will get wopping big values that are likely incorrect. I'm sure this was GOOG's problem (try GOOG with 5% risk premium and 15% growth rate).

It does not account for share dilution. So, companies that "reward" C-level management excessively with stock options will probably be overvalued, everything else being equal.

Also, it is using the Capital Asset Pricing model (CAPM) and beta to determine the company's WACC. Beta sucks. Watch what it is using. Except for the blueest of Blue Chips, I would not use a beta less than 1.

I do believe the calculations behind the scenes are reasonably accurate. So, if the inputs are good, the resulting value it calculates will be reasonable.

Rich
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For, MMM it gives a value of $103 and for JNJ a value of $96 based on default settings. If I adjust the risk premium to 5%, then I get $82 for MMM and $78 for JNJ. Those numbers are in the ballpark.


Interesting indeed because the intrinsic value calculator at ...err.. grahaminvestor.com comes up with $103-ish for MMM and $76-ish for JNJ.
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Hi Rich,

I thought the 3% looked too low for risk premium too, so I clicked on the link once and can not get it to open the description again (for ANY item.) However, I believe it uses risk over the tbill rate which should be about 7.5, which if I'm right is just about what I would plug in.

Using that, their valuation of JNJ would be right in the ballpark of mine.

Congrats on the new prefix (sucker.) :)

Best,

Dan

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Have you tried valuing GE with ValuePro?

The default values gives you a valuation of 7.96 with a stock that trades at 34.72. If you adjust the Equity Risk Premium at 5 then the result is 0 !!!

I believe that GE is an interesting pick right now but based on this formula it should have a value of 0. Do you believe that GE should have a 0 value ?? Do you believe that GE should has a stock price of 0 (the same as DRL that also provides a 0 value) ??

IMHO these kind of valuation pages should be use with extreme caution. Sometimes they provide a value that is reasonable but others it gives you something completeley wrong.

Best,

Hugo

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Hi Hugo,


Have you tried valuing GE with ValuePro?

The default values gives you a valuation of 7.96 with a stock that trades at 34.72. If you adjust the Equity Risk Premium at 5 then the result is 0 !!!


This brings up another word of caution. A FCF approach to valuing any kind of a bank or financial stock is not a valid way to go. GE owns GE Capital (a major lender and a bank of sorts) and it amounts to a major hunk of the entire business.

Without boring you with details, problems arise with what exactly FCF is with a bank. The standard definition is not correct.

Also, since at the end of the DCF calculation net debt is subtracted a bank that has a lot of deposits (which are reported as debt on the balnace sheet) will be given a very small value. This is not a realistic end result.

I find that a dividend discount model (DDM) is more appropriate for valuing shares of banks.

For GE, being the huge conglomerate it is, an accurate valuation would need to take a sum of the parts approach.

So, don't use Valuepro for any kind of financial stock (banks, insurance companies or GE).

Rich
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Hi GrahamInv,


Interesting indeed because the intrinsic value calculator at ...err.. grahaminvestor.com comes up with $103-ish for MMM and $76-ish for JNJ.

Could you provide a link? I tried to find it on your site and couldn't.

What method do you use?

Rich
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Hi Rich:

On the home page there's a quote box on the left "Get a GI Quote". Alternatively go to the quotes tab.

When you get the quote, scroll down to the "Forward Intrinsic Value"

I use Graham's intrinsic value formula. Currently it values GE at $46.17.
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So KO is only worth $45 and change, and USG is worth but $22?

:)

et
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So KO is only worth $45 and change, and USG is worth but $22?

I think the KO one is about right at the present time, surprisingly. As for USG, it looks like a case of gigo.

That's the problem with automating stuff like this. The output is only as good as the input.
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That's the problem with automating stuff like this. The output is only as good as the input.


And my LUK is worth zilch! So much for tax loss carry-forwards.

:)

et
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