How Do I Determine the Intrinsic Value of Stocks?

The intrinsic value of a stock is the value that analysts think the stock really represents after analyzing the company's financial condition, profit prospects and other factors that affect the company's production and operation. This so-called intrinsic value depends to some extent on the views of analysts or individual investors, so different conclusions may be reached for the same company. There are many ways to calculate the intrinsic value of a stock, but they are all calculated by discounting future income to the present value (the present value of future payments). ^[1]

Intrinsic value of stock

Intrinsic Value

So how is the intrinsic value of the stock determined?

There are generally three methods: the first

The calculation models of the intrinsic value of the stock are:

A.

Calculation method of stock intrinsic value:

Dividend Discount Model (DDM Model)

Discounted cash flow model (basic model)

The discounted cash flow model uses the capitalized pricing method of income to determine the intrinsic value of ordinary stocks. According to the capitalization pricing method of income, the intrinsic value of any asset is determined by the cash flows that the investor who owns the asset will accept in the future. The intrinsic value of an asset is equal to the discounted value of the expected cash flow.

1. The general formula of the cash flow model is as follows:

(Dt: Dividend per share expressed in cash in the future period k: Appropriate discount rate of cash flow at a certain level of risk V: Intrinsic value of the stock) Net present value is equal to the difference between intrinsic value and cost, which is NPV = VP where: P is the cost of purchasing stocks at t = 0

If NPV> 0, it means that the sum of the present value of all expected cash inflows is greater than the investment cost, that is, the price of this stock is undervalued, so buying this stock is feasible. If NPV <0, it means that the sum of the present value of all expected cash inflows is less than the investment cost, that is, the price of this stock is overvalued, so this stock cannot be purchased. The capital asset pricing model (CAPM) securities market line is usually used to calculate the expected rate of return for each security. This expected rate of return is used as the discount rate to calculate the intrinsic value.

Embedded rate of return model (IRR model)

1. Internal rate of return

The internal rate of return is the discount rate that makes the investment's net present value equal to zero.

(Dt: dividend per share expressed in cash in the future period k *: internal rate of return P: stock purchase price)

From this equation, the internal rate of return k * can be solved.

Zero growth model

1, assume that the growth rate of the dividend is equal to 0, i.e., Dt = D0 (1 + g) tt = 1,2, , by the general formula to obtain cash flow model: P = D0 / k <BR> <BR> 2, Internal rate of return k * = D0 / P

Constant-growth DDM

Formula

Assuming that dividends will always grow at a constant growth rate g, the general formula of the cash flow model is:

Internal rate of return

P / E valuation method

Price-earnings ratio, also known as price-earnings ratio, is the ratio between the price per share and earnings-per-share.

If we can separately estimate the price-earnings ratio and earnings per share of a stock, then we can indirectly estimate the stock price from this formula. This method of evaluating stock prices is the "price-earnings ratio valuation method".

example:

Calculate the intrinsic value of Gree Electric Appliances with a two-stage model:

Net profit growth rate:

21.00% in 2005,

24.00% in 2004,

13.85% in 2003,

13.41% in 2002,

4.20% in 2001,

8.90% in 2000,

8.20% in 1999,

6.72% in 1998,

7.64% in 1997,

20.08% in 1996.

Net profit in 1995: 151,572 million yuan.

Net profit in 2005: 50961 million yuan.

In 10 years, the net profit increased by 5.0961 ÷ 1.55172 = 3.28 times over 1995, and the 10-year compound growth rate was 12.6%.

Since Gree Electric Appliances has entered a period of rapid development, it is expected that the 10-year net profit growth rate: 15%.

Dividend rate:

37.89% in 2005, 38.92% in 2004, 41.9% in 2003, 46.5% in 2002, 45.05% in 2001, 45.07% in 2000, 51.06% in 1999, 55.38% in 1998, 0% in 1997, 65.72% in 1996,

Average after-tax dividend rate is 42.0%

In the future, the company will enter a period of rapid growth. The dividend rate will be appropriately reduced. The average post-tax dividend distribution rate in the next 10 years is expected to be: 35%

Twenty-year Treasury yield is 3.3% -7.0%, with an average of 4.5%. Considering the trend of interest rates, it is adjusted to 7%

Base P / E: 1 / 0.07 = 14.3

Annual earnings per share (yuan) Dividend discount factor present value of dividends

2005 0.95 0.3325

2006 1.0925 0.3823 0.935 0.3574

2007 1.2563 0.4397 0.873 0.3838

2008 1.4448 0.5056 0.816 0.4125

2009 1.6615 0.5815 0.763 0.4436

2010 1.9107 0.6687 0.713 0.4767

2011 2.1974 0.7690 0.666 0.5121

2012 2.5270 0.8844 0.623 0.5509

2013 2.9060 1.0171 0.582 0.5919

2014 3.3419 1.1696 0.544 0.6362

2015 3.8432 1.3451 0.508 0.6833

Total bonus value: 8.0955 yuan

Total present value of dividends: 5.0484 yuan

Since listing, it has raised a total of 740 million yuan, dividends of 1.48 billion yuan, and dividends / funding = 2, so the actual present dividend value is 5.04 / 2 = 2.5 yuan.

Discount rate: 7%

Profit growth rate: 15%

Dividend rate: 35%

The actual present value of dividends (after considering the dividend financing ratio) is: 2.5 yuan

The second stage, after the 10th year, the growth rate is: 7%

Earnings per share for the 10th year is 3.84 yuan

The current value discounted to the 10th year: 3.84 / 0.07 = 54.85 yuan

10th year discount factor is 0.508

The present value of the second stage: 54.85 * 0.508 = 27.86 yuan

The intrinsic value of the company's stock is: 27.86 + 2.5 = 30.36

Given a safety margin of more than 50%, 30.36 * 0.5 = 15.18 yuan.

(Adjustment after ex-rights and additional issuance is: (15.18-0.4) /1.5/1.16=8.49 yuan.

Given a safety margin of more than 60%, 30.36 * 0.4 = 12.14 yuan

(Adjusted after ex-rights and additional issuance: (12.14-0.4) /1.5/1.16=6.75 yuan)

Given a safety margin of more than 70%, 30.36 * 0.3 = 9.10 yuan

(Adjusted after ex-rights and additional issuance: (9.10-0.4) /1.5/1.16=5.00 yuan)

In order to obtain 15% annual compound interest, the highest price of Gree Electric Appliances can now be paid:

15% net profit growth

Expected price in 2015: 3.8432 * 14.3 = 54.90 yuan

Add expected dividend: $ 8.09

Estimated total revenue in 2015: 54.90 + 8.09 = 62.99 yuan

The highest price you can pay now to get 15% profit is 62.99 / 4.05 = 15.55 yuan.

(Adjusted after ex-rights and additional issuance: (15.55-0.4) /1.5/1.16=8.70 yuan)

Dynamic ROE model calculates Gree's intrinsic value:

Roe(%):

2005 18.72

2004 17.24

2003 15.53

2002 16.17

2001 15.82

2000 15.48

21.68 1999

26.3 1998

1997 32.9

33.56 1996

Average: 21.34%

The average return on net assets over the next 10 years is expected to be 18%.

Then the intrinsic value is:

Earnings per share (0.95) / discount rate (0.07) = 13.57 yuan

Return on equity (18%) / discount rate (7%) = 2.57

13.57 * 2.57 = 34.87 yuan, that is, the current value of Gree Electric's intrinsic value is 37.37 yuan.

The margin of safety given 50% off is 37.37 / 2 = 18.68 yuan.

(Adjusted after ex-rights and additional issuance: (18.68-0.4) /1.5/1.16=10.5 yuan)

Given a 40% discount on the margin of safety, 37.37 * 0.4 = 14.94 yuan

(Adjusted after ex-rights and additional issuance: (14.94-0.4) /1.5/1.16=8.35 yuan)

Given a 70% margin of safety, 37.37 * 0.3 = 11.21 yuan

(Adjusted after ex-rights and additional issues: (11.21-0.4) /1.5/1.16=6.20 yuan)

The growth rate is 10%, and it will grow 2.58 times in 10 years;

The growth rate is 12%, and it will grow 3.11 times in 10 years;

The growth rate is 15%, and it will grow 4.05 times in 10 years;

The growth rate is 16%, and it will grow 4.41 times in 10 years;

The growth rate is 18%, and it will grow 5.23 times in 10 years;

20% growth rate, 6.08 times in 10 years;

The growth rate is 25%, which will grow 9.31 times in 10 years;

The growth rate is 30%, which will grow 13.79 times in 10 years;

The growth rate is 40%, and it will grow 28.95 times in 10 years;