Fair Value & DCF Model


Margin of Safety (Premium Plus)

Unit: Percentage

The percentage difference between a company’s Fair Value and its price. This metric the single most significant valuation metric in our arsenal as it is the final output of detailed discounted cash flow analysis.

Fair Value (Premium Plus)

Unit: Number

We compute the Fair Value of a company by using a discounted cash flow analysis to determine the Intrinsic Value. We then rank firms in each Sector by their Intrinsic Value to find a value that is well suited to current market multiples. Over the long term our Fair Values will imply a 30% drop in price for the worst stocks and a 45% gain for the best stocks.

Margin of Safety (Academic) (Premium Plus)

Unit: Percentage

The percentage difference between a company’s Fair Value (Academic) and its price. When this value is close to the non-academic Margin of Safety value it provides higher confidence in the result.

Fair Value (Academic) (Premium Plus)

Unit: Number

We compute the Fair Value (Academic) of a company by using a discounted cash flow analysis with the academic formual for Intrinsic Value that forecasts cashflows into perpituity. We then rank firms in each Sector by their Intrinsic Value to find a value that is well suited to current market multiples. Over the long term our Fair Values will imply a 30% drop in price for the worst stocks and a 45% gain for the best stocks.

Margin of Safety EV to Sales (Premium Plus)

Unit: Percentage

The percentage different between a firms fair value (as determined by the EV / Sales ratio) and its current price. A higher margin of safety is better but this valuation method is imprecise as it uses very generalized criteria.

Fair Value (EV / Sales) (Premium Plus)

Unit: Number

This fair falue determined by ranking stocks in a sector by their EV / Sales ratios. It is a fallback for when discounted cashflow analysis cannot be calculated. Over the long term this value will imply a 30% drop in price for the worst stocks and a 45% gain for the best stocks.

Cost of Debt (Premium Plus)

Unit: Percentage

Cost of Debt is calculated from interest expense and total debt. It is used to compute a Weighted Average Cost of Capital.

Cost of Equity (Premium Plus)

Unit: Percentage

The CAPM (Capital Asset Pricing Model) determines the cost of equity for stocks. It gives higher Beta stocks a higher cost and is used to determine a Weighted Average Cost of Capital.

Debt Percent (Premium Plus)

Unit: Number

The percent of a company’s enterprise value that is from debt as opposed to shares.

Equity Percent (Premium Plus)

Unit: Number

The percent of a company’s enterprise value that is from shares as opposed to debt.

Model FCF Y1 (Premium Plus)

Unit: Number

The forward Free Cash Flow for next year predicted by our discounted cash flow analysis. Our computations use analyst estimates for the stock and industry as well historical growth rates.

Model FCF Y2 (Premium Plus)

Unit: Number

The forward Free Cash Flow for 2 years in the future predicted by our discounted cash flow analysis. Our computations use analyst estimates for the stock and industry as well historical growth rates.

Model FCF Y3 (Premium Plus)

Unit: Number

The forward Free Cash Flow for 3 years in the future predicted by our discounted cash flow analysis. Our computations use analyst estimates for the stock and industry as well historical growth rates.

Model FCF Y4 (Premium Plus)

Unit: Number

The forward Free Cash Flow for 4 years in the future predicted by our discounted cash flow analysis. Our computations use analyst estimates for the stock and industry as well historical growth rates.

Model FCF Y5 (Premium Plus)

Unit: Number

The forward Free Cash Flow for 5 years in the future predicted by our discounted cash flow analysis. Our computations use analyst estimates for the stock and industry as well historical growth rates.

Forward EBITDA Growth (Premium Plus)

Unit: Number

The estimated growth in EBITDA for next year based on analyst estimates for this company and for its industry and sector peers.

Industry Historical Multiple (Premium Plus)

Unit: Number

The longterm average EV / EBITDA of profitable companies in this stocks’ industry. For financial services companies Price / Earnings is used instead.

Instrinsic Value (Academic) (Premium Plus)

Unit: Number

The intrinsic value of a company determined by adding the Net Present Value of Cashflows and the Terminal Value (Academic). The intrinsic value can vary greatly from the stock market valuation of a firm and Warren Buffett has been known to apply as much as a 50% discount to the intrinsic value of a stock as his price target.

Intrinsic Value Exit Multiple (Premium Plus)

Unit: Number

The intrinsic value of a company determined by adding the Net Present Value of Cashflows and the Terminal Value Exit Multiple. The intrinsic value can vary greatly from the stock market valuation of a firm and Warren Buffett has been known to apply as much as a 50% discount to the intrinsic value of a stock as his price target.

Intrinsic Value EV to Sales (Premium Plus)

Unit: Number

The intrinsic value of a company determined by comparing its EV / Sales ratio vs. industry norms.

Net Present Value of Cashflows (Premium Plus)

Unit: Number

The value of future cashflows discounted to the present. It is an important part in determining the Intrinsic Value of a company.

Terminal Growth Rate (Premium Plus)

Unit: Number

The long term estimate for free cash flow growth rate for a company used in discounted cash flow analysis. We use historical observations of the stocks industry instead of future predictions to determine this value.

Terminal Value (Academic) (Premium Plus)

Unit: Number

In discounted cash flow analysis, this is the terminal value of a company is future cash flows are forecasted into perpituity. Forecasting into perpituity is the more academic means of computing a terminal value as exit multiple valuations are more common with investors.

Terminal Value Exit Multiple (Premium Plus)

Unit: Number

In discounted cash flow analysis, this is the terminal value of a company by computing a future EBITDA / EV ratios.

Weighted Average Cost of Capital (Premium Plus)

Unit: Number

The blended cost of capital across all sources. A company with a high cost here needs to offset it with high future free cash flows or else its Intrinsic Value will be low.


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