Guide to the Corequity Analysis

The objective of COREQUITY ANALYSIS is to determine the intrinsic value of an  equity in the context of the company’s earnings characteristics.

Equity performance has three components which are 1) dividend yield, 2) growth, and 3) change in valuation. In order to project the third component, it is necessary to measure the combined return from the first two.

Growth (RR) is calculated from the normalized earnings which are reinvested in the company, divided by the book value. When added to the Dividend Yield (YLD), the two comprise the Inherent Return (IR). This is the total return to the shareholder if the price-to-earnings ratio remains constant.

However, equity P/E’s are continuously being revalued – often in response to changes in institutional investors’ shared opinions of the future prospects.

As the growth rate has a major influence on the P/E ratio, it is highly desirable to use a measure of value that relates the price-to-earnings ratio to the return provided from growth and yield.  Payback (PB) provides such a measure. It is defined as the number of years to payback the stock price from the earnings which are growing at a rate equal to the Inherent Return less inflation.

Once the Payback is calculated, its current applicability to the equity must be evaluated. By comparing the stock’s payback to the market’s Payback over time, a normal valuation range is derived for each individual equity for comparison to its current relative value.

It can thus be shown that companies that consistently sell at a premium are good values at a small premium, while others can be fully priced at a discount.

This relative valuation range is used to project a projected price range. The Valuation Risk, or Return (VR) is the percentage difference between the current price and the average of the projected range.

COLUMN HEADINGS

FY. The FISCAL QUARTER for which the data is presented., YEAR indicates the actual year.

ET. The Earnings Type. 1 is as is, 2 = Smoothed earnings, 3 = Smoothed earnings using a 2 year moving average, etc.

IndNo. Indicates the Value Line industry

CPR. Closing Price

VR. VALUATION RISK (-) or VALUATION RETURN (+). VR is the percentage price change that would occur if the stock price were equal to its intrinsic investment value which is defined as the average of the projected prices.

RR. REINVESTMENT RETURN is the growth from the normalized earnings reinvested in the company. It is the retained earnings divided by the accumulated equity. It is the best measure of internally generated growth of earnings, dividends and book value.

IR. INHERENT RETURN is the sum of the dividend yield and the growth.

YLD. Dividend divided by the price (CPR)

PTR. PROJECTED TOTAL RETURN is the product of sum of the RR and YLD  times  1 + VR.

PB. PAYBACK is the number of years required to payback the stock price from the earnings growing at a rate equal to the IR less inflation.

PC. RELATIVE PAYBACK is the stock’s current Payback divided by the median Payback.

PC. Is the target relative PB.

EST. Estimate used whether Value Line or (starting in the 4th Qtr ’07) the consensus estimate, if significantly different

MPEPS. The earnings used in the calculations are smoothed (MPEPS) (ET>1), or nominal earnings (ET = 1).

IEPS. The Implied Earnings per Share required to make the stock neutrally valued at the average of the assigned relative valuation range (for the latter, see under NM).

(C) 2017 Robert L. Colby

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