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How to Find the Intrinsic Value of a Stock! [2020] - Episode 5 - YouTube
Channel: Value Investing: Henrikh
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I'll show real-life examples for the
Ulta Beauty stock
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this is episode #5
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in this video we will go over stock
price calculation method which will give
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us enough competency about the stock
buying price
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we'll learn about stock price prediction
methods then we'll calculate today's
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buying price
based on the future price then we'll use
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the margin of safety to find the best
safe price
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we should pay for a stock to be sure we
don't overpay for it
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you must exactly know what is your safe
buying price because if you
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overpay your future returns will be
slaughtered
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this is episode #5 which is all
about study #4
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of our full investment analysis and the
title is
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price of the stock if you have missed
our previous videos you can go
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back to our videos and start watching
them
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from episode #1 or you can just
click on the card here
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to open the playlist but before we start
please make sure I'm not a financial
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advisor and I don't provide
any investment recommendation and in
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this video which has an educational
purpose only
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I only share my thoughts about various
talks
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before you invest in anything please do
your own research and analysis also make
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sure you subscribe to this channel to
receive our
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weekly videos if you want to expand your
financial skills
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ok let's start there are many ways to
calculate the intrinsic value of a stock
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even many value investors do it
differently one investor uses the 10 or
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20 years discounted cash flow formula
another investor uses other systems
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Phil Town teaches three other formulas
which are the margin of safety price
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the payback price and the 10 cap price
my calculation method is a little
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different from
all of them but the logic behind it is
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mostly close to the margin of safety
price calculation method
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founded by Phil Town let me describe it as
a long-term value investor firstly we
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need to predict
what will be the stock price in 10 years
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and after that
only we calculate the current safest
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price we are willing to pay for the
stock to meet our investment goals
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so there are two steps step #1
is to predict what will be the stock
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price in 10 years
and step #2 is to convert it to
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today's price
so to find out what will be the stock
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price in 10 years we need to forecast
the business growth rate first how do we
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do it
let me bring an example we go to the
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macrotrends.net
website and search for ulta beauty which
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is a great example of a wonderful
company
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let's say we already have gone over all
investment studies for this company and
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we already love it
and want to own it considering that we
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have a company that has an
excellent consistent growth as I
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described in study #2 by the way
if you have missed that video click the
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card here to learn how we find the most
wonderful companies
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based on the financials of the company
okay we go to the price ratios as the
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main section
and choose the subsection of PE ratio
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here as the info
is presented very plainly here we see
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the per share data together with
data that shows the comparison of that
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data to the price
in other words you see the stock price
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in the first part then the per share
data in the second part
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then in the third part you see the
multiplier the ratio
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that is the price divided by the per
share data
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on this page we take the latest data of
earnings per share
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by keeping the mouse over it also we fix
the date of the data
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in this case it is January of 2020 and
the
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earnings per share is 12.16
we take that number and put it in our
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calculator ahead of the field called
today's amount
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after that we go back 10 years and take
the January
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data of 2010. so we take the data of 0.66 and we put in the calculator for the
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field called
initial amount and in the next field
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called years we put 10
and the calculator shows us that the
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annual compounding
interest rate is 34% don't worry
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about the functions behind the
calculator you can go to this video
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description
where I will put the link to this google
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sheet so that you can download and use
it for your own analysis as well
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also you can see the functions in the
online version
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so this means that earnings per share
has been growing for 34%
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annually for the last 10 years and we
take that 34%
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and put it in our table in the column
which shows the
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10-year compounding rate for earnings
per share and we do the same process for
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seven-year five-year and three-year
columns as well as for sales per share
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book value per share and operating cash
flow per share after that the table
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shows the results of that data
which is the average data for those
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numbers so in this case we get
27 20 15 and 24%
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as an average growth rate for the data
like earnings
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sales book value and operating cash flow
per share having
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these 4 growth rates we decide
ourselves what will
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be the most realistic overall growth
rate for the business
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we try to take the conservative average
for
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those 4 growth rates as the growth
rate is one of the most important
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numbers in the future stock price
prediction process
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we try to be very conservative first and
foremost I consider
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20 for any growth rate which is above 20
as it's really a big number for the
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growth rate as
not every business can be growing for
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over 20%
annually and for decades this is less
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realistic so I consider
those 27% and 24% growth
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rates as a 20% growth rate and in
this case we will have
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three 20% growth rates and the 15
percent growth rate in those
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cases I usually take maybe from 16
to 18 as a total conservative growth
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rate for the business
let's put it 17. so I think Ulta Beauty
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will grow
at a 17% rate annually for the next 10
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years so we finally have that number the
growth rate for the next 10 years
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the next thing we do is take those 4
numbers of current
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earnings sales book value and operating
cash flow
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per share data and increase it with our
17% growth rate annually for 10
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years so that we can know
what those numbers will look like in 10
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years
in this column we have the results these
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three columns
data is relative to 10 years later now
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we should find out what will be the
multiplier in 10 years so that we can
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multiply the per share
data in 10 years with the multiplier in
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10 years to get the share
price in 10 years that's it very simple
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to get what will be the multiplier in 10
years
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we need to understand the historical
multiplier
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and take the realistic value from there
which will be
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above the average number but not the
highest number
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why don't we take the average and take
the above-average amount because we
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really want to sell our businesses when
they are rocking not when they are
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growing with their standard flow as
Phil Town explains we really want to sell
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our businesses when they are doing
very well even sometimes better than
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they should do so I'll bring the example
on the earnings per share data but you
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should do the same for
all 4 of them let's see what is the
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historical PE ratio of Ulta Beauty so it has been in
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the range between about
13 to 46 but mostly it has been within
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the range of 23
to 38 maybe so the average would be
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30 or 31 but the better-average number
would be 34 or 35 I think
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so in this case I would take the 34
as the multiplier also it is a very
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famous best practice to take the PE
ratio twice the growth rate so in this
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case it's
absolutely identical definitely the 34
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number will be our multiplier for the
earnings per share
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the same we should do for other three
metrics as well and we should finally
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multiply the per share data with the
forecasted multipliers to get the share
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price in 10 years so in this column we
will get the forecasted share prices
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based on certain metrics and if you get
close numbers it
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is an indicator that we are doing
something right and from
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these 4 forecasted share prices we
will take the one
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that is below average the conservative
number in this case
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I took about $1,700 so we can say that
our analysis shows that Ulta Beauty
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should have been trading
at around $1,700 in
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10 years if we didn't have an economic
collapse as
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in 2020 so please take into
consideration that these calculations
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are based on the data
of up to January of 2020. after that we
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had an
economic shutdown so don't take into
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account those numbers
or even a rough calculations this video
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example is only for
educational purposes by the way hit the
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like button that
like button is really important for us
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if you would like to support this
channel
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as we have the 10 years forecasted share
price it's the right time to go to step #2
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where we will convert
that number to today's number to
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understand what price we are willing to
pay
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today to have a successful investment I
usually divide the 10-year forecasted
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price to 8 to get my today's buying
price in this case I divide
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1700 to 8 and I get about 212. so if I
can
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get Ultra Beauty stock at about $212
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that would be the greatest opportunity
for me let me explain
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why I divide it into 8 in short I
divide the 10-year forecasted price
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firstly to 4 then divide again to
2 which together is basically the same
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as dividing to
8 I divide it to 4 because that's
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my target for my investments if my
investments grow at least 4 times in
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10 years that will make me really happy
which is basically the same as getting
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about
15% annually on my investments as
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you have noticed the 15%
annual return is my goal and if yours is
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another then you can adjust
the division to 4 part to your number
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and later why I divide to 2 because I
love to buy things using
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50% margin of safety which gives me a big
capacity to be twice incorrect
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on my forecasts for which I sleep well
at night
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basically 50% margin of safety is almost
the same as discounting
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7-8% annually on the growth rate
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while calculating the intrinsic value in
other words if you discount any
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realistic
growth rate with 7-8%
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annually you'll get the same number in
10 years as you just don't discount at
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all
and at the end drop the buying price by
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half so that way
we'll be safe enough for the future as
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we try to buy
$10 bills with $5 as
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Phil Town
likes to say we try to buy companies on
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sale to have the lowest risk in the deal
to meet Warren Buffett's rule #1
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and rule #2 as Warren Buffett
says rule #1
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never lose money rule #2 never
forget
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rule #1 and that's why we drop
the risk by 50%
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the conclusion is that the current
intrinsic value would be about
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$212 for the ultra beauty stock if we
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didn't have an unexpected collapse
so again don't take those numbers as a
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basis for your analysis
as a lot has changed this year and all
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metrics have dropped vastly there are
3 more important things I need to
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mention
first one is that macro trends website
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provides the price to earnings price to
sales
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and price to book value per share data
but not the price to operating cash flow
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for which you can visit
guru focus website in guru focus website
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you can find the ratio
and the operating cash flow itself the
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second thing I need to mention
is that you also can find similar
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analysis
done in rule 1 investing website and the
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final thing I need to mention is that if
you analyze a dividend paying company
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then you should add a dividend to the
book value calculations
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as well as that is the amount that is
deducted from the book value the next
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episode #6 will be
all about the investor's mindset
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psychology
behavior skills and competency watch it
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to know
how you can think like a successful
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investor in order to gain success now
please make sure you subscribe and hit
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forget to leave your comments below as I
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really want to know what are your buying
price calculation methods
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thanks for watching watch the next video
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