tag:blogger.com,1999:blog-6587699706949333863.post3743741192650167369..comments2024-03-27T23:39:33.499-05:00Comments on Passive Income Pursuit: Stock Valuation Method - Discounted Cash FlowPassive Income Pursuithttp://www.blogger.com/profile/13947101854482544346noreply@blogger.comBlogger8125tag:blogger.com,1999:blog-6587699706949333863.post-78081529572743040212013-04-24T14:18:21.685-05:002013-04-24T14:18:21.685-05:00DM,
Thanks. After having a comment somewhere el...DM, <br /><br />Thanks. After having a comment somewhere else on my blog asking about valuation I figured I should start a series covering the valuation techniques. I think to get a good estimate of the price it's important to look at several different methods of valuing a company and if it looks cheap compared to most of the methods then it's a good bet that it's currently unloved by the market.<br /><br />It's a shame that the the DDM/DCF are so sensitive because I think they're two of the better ways to value a company since it's forward looking. But growth estimates one year out are hard enough to guess so going multiple years/decades out is exponentially harder. You bring up a good point about trying to still have a margin of safety despite the built in conservative estimates going into the formulas. Most of the time I look to buy at my target entry price from my stock analysis posts since that price is based off the averages of the low historical ranges and the DCF/DDM which I also use fairly conservative estimates. Especially for the long-term growth. I think even companies as large as KO, PG...will still be able to grow faster than the historical rate of inflation (~3.5%) but I typically use that as the terminal growth rate.<br /><br />Thanks for stopping by!Passive Income Pursuithttps://www.blogger.com/profile/13947101854482544346noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-71084679249267241962013-04-23T19:21:49.679-05:002013-04-23T19:21:49.679-05:00Pursuit,
Awesome series here. I like your approac...Pursuit,<br /><br />Awesome series here. I like your approach to use multiple valuation methods and then try to average them together. The DDM and DCF models are particularly sensitive to input, as you mention...so they are prone to error. I always try to use them fairly conservatively and even then shoot for a number below what they spit out as a fair value. <br /><br />Great work. Keep it up!<br /><br />Best wishes.Dividend Mantrahttp://www.dividendmantra.comnoreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-34930819897998732492013-04-23T07:46:24.883-05:002013-04-23T07:46:24.883-05:00MG,
No problem. I think going through the DDM a...MG, <br /><br />No problem. I think going through the DDM analysis, dividend discount model, you shouldn't add the current assets into the value because you're looking for the cash flow from the dividends and not necessarily the growth of the company, at least for a buy/hold/monitor investor. Although a growing dividend should mean a growing company. I'll be covering the DDM next week so stay tuned.<br /><br />Thanks for stopping by!Passive Income Pursuithttps://www.blogger.com/profile/13947101854482544346noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-58574582085956549312013-04-23T07:43:00.466-05:002013-04-23T07:43:00.466-05:00CI,
Looking back through the post, I probably ne...CI, <br /><br />Looking back through the post, I probably need to go add something about discount rates and target ranges. I like the DCF although it does have it's limitations, but what method doesn't? The historical p/e, dividend yield, p/s are exactly what they say historical averages and unfortunately I've never come across something that says the company must trade within those ranges in the future. The DCF gives you a chance to do a bit of looking toward the future.<br /><br />Glad you like the spreadsheet. It actually didn't take that long to set up and I think it turned out pretty nice. I think you should be able to save it in case you want to make any changes, but I'm not positive if the share settings are right. If you notice anything about that let me know and I'll see what I can do.<br /><br />Thanks for stopping by!Passive Income Pursuithttps://www.blogger.com/profile/13947101854482544346noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-84673844010243678252013-04-23T04:49:12.388-05:002013-04-23T04:49:12.388-05:00Good write up here. DCF is one of the methods I u...Good write up here. DCF is one of the methods I use to figure out buy prices. I like to use a 10% discount rate except for utilities and telecoms. Glad you mention that inputs are sensitive! It is best to be conservative. DCF is useful although there is too much room for error to use it exclusively.<br /><br />Wow your spreadsheet is actually very nice! I think I will use that instead of the site I normally go to. Cool!Compounding Incomehttps://www.blogger.com/profile/04207986983526689578noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-67223785033364556362013-04-22T18:17:12.000-05:002013-04-22T18:17:12.000-05:00Hi PIP,
Thank you for your considered response. I...Hi PIP,<br />Thank you for your considered response. I actually missed the fact that you were performing a NPV analysis on EPS and not dividends - which I believe some other folks do. Seems that I need to do some more thinking on the subject.<br /><br />Cheers,<br />MGAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-43097553630996896182013-04-22T12:39:23.359-05:002013-04-22T12:39:23.359-05:00MG,
Yes the remaining assets upon closing shop w...MG, <br /><br />Yes the remaining assets upon closing shop would be liquidated and returned to the debt/shareholders. Now cash and equivalents are easy to value, but as far as plants/equipment/office furniture...you won't get par value for those so you'd have to apply some kind of discount to those values. The more in depth DCF analysis where you look at actual cash flows by projecting tax rates, revenue growth, operating margin, depreciation/amortization...does go through the process of adding the current assets back into the final value. The DCF analysis I presented shows more of an assumed constant valuation metric based on the EPS (P/E ratio) and a long-term buy/hold/monitor investor. It goes through the DCF process by looking at the future EPS and getting the NPV of those. If a constant P/E is assumed then if you can purchase at a lower price than the fair value from this process and the EPS grow at the same rate as you assumed, then theoretically with a constant P/E ratio you'll earn your discount rate or better on the investment. I'm already thinking of a follow up post to cover the more in-depth process of running through a DCF analysis where you look at the actual cash flows, so that might be in the works. <br /><br />Thanks for stopping by and thanks for the compliment! There's no dumb questions as long as you're sincere in asking them. I'm a self-taught investor and also human, so I'm bound to make mistakes. Anything to get the conversation going is always welcomed by me.Passive Income Pursuithttps://www.blogger.com/profile/13947101854482544346noreply@blogger.comtag:blogger.com,1999:blog-6587699706949333863.post-42440424848345325802013-04-22T11:19:29.576-05:002013-04-22T11:19:29.576-05:00Hello Pip!
Always enjoy your informative posts and...Hello Pip!<br />Always enjoy your informative posts and am trying to learn about valuation. I have a "dumb" question about the discounted cashflow approach. I understand that basically you are trying to determine today's value of all future cashflows but are you not omitting some valuation of today's assets/book value? So if a company was only going to be in business for 5 years and then close down its operations, the stock value should be the discounted future cashflows PLUS any cash the company would get for its assets on dissolution. What am I missing? Is there no other value to the company than its future dividend payouts? Or does the valuation approach assume that the dividends would not be payable without the company's assets? Hmmm....<br />Please let me know what you think.<br />Thanks.<br />MGAnonymousnoreply@blogger.com