Robert R. Johnson , Ph.D., CFA, CAIA, is a professor of finance in the Heider College of Business at Creighton University.
Stephen M. Horan is a managing director and co-leads educational activities at CFA Institute.
Thomas R. Robinson , CFA, provides leadership to CFA Institute’s largest region, the Americas, which includes Canada, the U.S., the Caribbean and Latin America.


Discussion

Samuel Urso from FL posted 8 months ago:

Good article and examples.


Jamal Abdel Jabbar from IL posted 8 months ago:

Recommended article to Equity Analysts


Richard Thomas from FL posted 7 months ago:

Quoting the author, "An important assumption in using a relative valuation method is that the companies or index you are using for comparison purposes are fairly valued. If you feel the peer companies or index are overvalued, then relative valuation may not be an appropriate method." This raises the $64,000 question, How do you determine if the "peer companies" are fairly valued? Whatever method used to answer this question may also determine if the company in question is fairly valued as well.

Surprised to see no mention of the PEG ratio in the discussion of the high-growth stocks like Facebook. PEG=P/E/G so for FB's forward P/E of 40 divided by its expected growth rate of 35% gives a PEG of 1.14 indicating FB is 14% overvalued. However, using FB's TTM P/E of 99, the PEG ratio indicates FB is selling at 283% of its intrinsic value. Purchasing at these levels might be considered as speculation that the greater fool theory will pan out.

Boeing (BA). Earnings are expected to grow only 4% over the next year and then pick up to around 10-11% the next few years thereafter. With their dividend payout ratio of 32% being close to their 10 year historical average and not knowing their dividend payout policy, using 12% dividend growth may be a bit optimistic. Otherwise a good illustration of DDM valuation.

Nice introduction to valuation but it would have been nice to see a little more depth in DCF and FCF computations and analysis.


Mort Mazaheri from AZ posted 7 months ago:

This was a good analysis of various techniques.

The problems is that most investors, even the savvy one do not have the access to the level of details for making decisions. Is it possible to develope equations for each set of approaches to simplify the process and labling them most likely, less likely, etc ?


Manjunath Sharma from CA posted 9 days ago:

DCF model for Boeing is utter non-sense. Academics have pushed this DCF model for long time and it is being shunned by top B-schools. See Stephen Penman (Columbia University). If I follow his method of RIM and use EPS estimates (savings model), I can value any company and a range of values (with COC 8% to 11%) and abnormal earnings growth rate from 3% to 9%.


JOHN from NEW YORK posted 9 days ago:

WELL DONE


David Phillips from AL posted 8 days ago:

I would like to highly recommend the authors' book "Strategic Value Investing". It is the best book of this type because it lays a helpful foundation and builds on it in a logical progression.

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"We learn from each other and wind up teaching ourselves". James Beard, famous chef.


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