How To Calculate A Stock Intrinsic Value

In the previous articles, we have covered on buying a stock that is below its market value. There are 1001 ways on how to define an intrinsic value of a stock. As you know, stock market price is fluctuated every now and then. You will never know at what price that market reflects a stock true value.

I will share on how to come out with intrinsic value. I may not be possible to cover all methods of the stock valuation in one article but will try to cover it as many as I can in the next series of articles.

Intrinsic Value Illustration

Intrinsic Value Illustration

 

Just remember, calculating an intrinsic value is not an exact science. It is a projection or estimation on the future value of a stock price based on business historical performance. What determine a future value is subject to a lot of factors, variables and parameters:

  • Business performance – can a company sustain its current performance in the next 10 years?
  • Business trend – Will the trend change? (best classic example, Nokia used to be a leader in Cellular phone  but it has been knocked down once Apple Inc.  introduce Iphone. Now Apple Inc. faced the same cycle where Samsung has slowly become No.1 in Smart Phone Industry)
  • Economic condition (country, regional and global)
  • Company’s financial condition (debt, cash flow, Earning, future expansion and capital expenditure etc)
  • Talented CEO or Board of directors

For the above criteria, you need to be really conservative in your stock valuation. One of the stock investor legend (Benjamin Graham and Seth Klarman), they factor in the so-called Margin of Safety (MOS). On the other hand, coming out with Stock Intrinsic Value, it is an estimation. Famous saying by Warren Buffett, “It is better to be approximately right than precisely wrong.” An intrinsic value of a stock will give a hint or gut feeling whether a stock value can be undervalued or overvalued.

Why do we bother to find an intrinsic value? Here’s the reason why. Assuming a company’s earning growth 15% on yearly basis. Current Earning is RM100 million. Next 10 years, if a company accumulated RM100 million every year, by year 2023 company has accumulated RM1 billion. Next step is, in the next 10 years [2023], will the value of RM1.00 in 2023 be equivalent to RM1.00 in 2013. You never know what is the inflation rate like, interest rate, BLR rate etc. What do you need to do? You need to factor in Discounted rate.

Let’s use a real company information and come out with intrinsic value. I choose Tomypak Holding Berhad.

Tomypak Counter

Tomypak Counter

In the previous article, I have shared where to find all the relevant information (http://www.investmentmalaysia.org/2013/04/where-to-find-wtf-investment-tools/). This will help you to estimate intrinsic value of a stock.

Tomypak Balance Sheet 2012

Tomypak Balance Sheet 2012

 

Tomypak Profit & Loss Statement

Tomypak Profit & Loss Statement

Tomypak Cash Flow Statement

Tomypak Cash Flow Statement

 

Tomypak Cashflow Statement

Tomypak Cashflow Statement

Don’t worry on how-to formula. I have developed excel sheet formula, you just need to plug-in:

  1. Current year net profit (from Profit & Loss statement)
  2. Total outstanding share in the market
  3. Cash and Equivalent (from Balance sheet statement)
  4. Total debt (From balance sheet statement)
  5. EPS growth rate is standardized though some investment analysts give 26% CAGR-3 years-EPS growth rate. (remember: be conservative)
Tomypak Intrinsic Value

Tomypak Intrinsic Value

 

Tomypak current market price as of last week was RM1.41. Comparing its intrinsic value RM3.04, our entry price should be at RM1.52 or below (the lower the better it is). So, does that mean when we buy RM1.41 we will immediately get RM3.04? It will take time for the market to realize tomypak market value. if lucky enough, we may see the realization in 2-3 years. To be successful in investing, you need to have 3P Persistent, Perseverance and Patience.

3P: Persistence, Perseverance and Patience

3P: Persistence, Perseverance and Patience

 

Some additional information on Tomypak. On top of margin of safety price, a dividend will be a safety net for your investment while waiting for market to realize a stock value. At least, you have passive income plus capital appreciation.

Tomypak EPS Historical

Tomypak EPS Historical

 

Tomypak Dividend History

Tomypak Dividend History

 

Another factor to decide:

  • A company has been consistently and continuously paying dividends to stock holder
  • A company has recorded uninterrupted net profit for many years
  • A company’s operating cash flow
  • Proven record on ROE (Return on Equity) that company has efficiently used capital and provide reward to shareholders.
  • Conservative debt management – net cash is preferred

 

 

Disclaimer: The above article is just for educational purpose. Not intended as buy or sell call recommendation. Please do you own analysis before investing.

About Zayed Zulkifli

A graduate from Lehigh University Bachelor of Science in Business and Economics majoring in Business Finance. He has been a stock market investor since the US Sub-Prime Crisis.

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  6. Salam, thank you for the great articles. I’ve got your excel file. A question, may I know how do we determine the value for MOS?

    • Zayed Zulkifli says:

      hi faizal, there’s no universal standard or benchmark on how wide is the margin of safety (MOS). it totally depends on the investor’s risk profile. for Risk averse investor, they might want to use higher MOS between 50-80%.

  7. I realised that you are using 20% p.a. discount rate. Based on my internet reading ( don’t have any finance background), the discount rate is normally determined thru beta value of the stock. Would you mind sharing the basis and calculation?

    • Zayed Zulkifli says:

      Faizal, what i have used, it is pretty much standard in finance courses that based on interest rate. secondly, u might want to be more conservative in your estimation, meaning, u might want to use highest rate, to avoid buying overvalued stock

      third, However, if you are investing in a stock’s fundamentals, beta has plenty of shortcomings. For starters, beta doesn’t incorporate new information. Beta is a measure of a stock’s volatility in relation to the market. as fundamental investors, we don’t really care market volatility

  8. Zayed, in the formula sheet, the Total Debt value is not used in any other cells. Should it be deducted from the ‘present value’. I’m just guessing..

    Also, is 20% discount rate is common in Malaysia environment? Seems too high.

    What could be the factors o determine the discount rate to use on the forecasted cashflow?

    Thanks.

    • Zayed Zulkifli says:

      Total debt is not something that we can project. What we are projecting is the future earning and accumulate it into present value.

      on discount, it is total discretion at value investors. Nowadays, market is really volatile compared to 10 years ago. the higher the rate, the better it is. Look at US shut down issue or Europe debt crisis, or US subprime crisis. what we want to find, is a stock that really give us huge discount with high margin of safety. with that, u can avoid buying overvalue stock and u can sleep well at night.

      • In term of total debt that is extracted from the financial statement, if I’m not mistaken, the total debt number is not forecasted, but the actual remaining in the present value. So, wouldn’t it be fair if we deduct from our earning present value?

        Oh ya, appreciate it also if you could explain a bit on the calculation of Residual value 2022.

        Thank you.

  9. Hi, I’m trying to find the excel, but I don’t know where to download the file. May I have it?

  10. Dear sir,
    May I know where can I download your excel for intrinsic calculator?

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