Stock valuation - Real world application forever, possible, concepts, valuation

glamorous

Hi,

I am trying to value a stock using the concepts i have learn t in CFA level 1. Below is the scenario.

Google (goog) B/S - Assets = 40bn
Liabilities = 4bn
Equity = 36bn (Retained Earnings - 20bn)

I/S - EPS = 20.11 (diluted) remaining same forever (perpetuity)

Total no of shares = 0.32bn

No dividends, assuming no growth rate.

I am trying to find the current value of the stock, i am trying to be as conservative as possible i am taking a ROR of 5.25% pa (10yr note) + 2% current US inflation (assumption)

Here is my calculation:

Current value as per the book + future earning
(36/0.32) + (20.11/0.0725) = 112.5 + 277.3 = 389.87

is this reasonable for stock valuation?

The intention of this exercise is to apply my knowledge directly to a real world scenario any healthy comments would be greatly appreciated. Thanks



Edited 1 time(s). Last edit at Wednesday, October 13, 2010 at 10:04AM by bigspydee.

burnsy562000

i dont think so. thats combining two different valuation methodologies. u could use either a book value multiple or discounted cash flow / dividend discount model.



Edited 1 time(s). Last edit at Friday, October 15, 2010 at 09:41PM by oz001.

amqata

The answers to all these questions is pretty much no. It's like learning Black scholes for the first time and deciding that you can make your computer beat the options market.

Doing this kind of analysis is good practice for CFA exams, but usually the bigger the company, the more difficult it is to get thing to tie out in neat CFA ways (I haven't looked at GOOG financials in probably ever so I don't know about them). There are all kinds of good lessons to be learned from FSA but the big ones are stuff like:
a) growth rates matter huge and they are unpredictable (at least to me).
b) there are lots of shenanigans in books that give you some idea of risk in investing in the company - off-balance sheet stuff, goodwill, treasury stock holdings, and just about anything you look at and say "What the heck is that?"
c) Debt is leverage for better or worse
d) Many of the items on the financials require examination - e.g. inventory for a silver producer is much more easily valued than inventory for Barnes and Noble.
e) You can use financials to do stuff like assess cash takeout risk on converts much more easily than you can use it to decide whether a stock is fairly priced.

So in general, you are being taught stuff that doesn't work for what the tell you it works for. But learning it is still valuable.

BTW - Imagine if Yahoo gets taken out by Blackstone or someone while Google is still investing money in driverless cars and windfarms. It will be the most differently managed companies to ever be the two market leaders in the history of the earth.