2014年8月6日星期三

Benjamin Graham's Growth Valuation - APOLLO (6432)

Author: Intelligent Investor   |   Publish date: Wed, 6 Aug 17:18
What will be the intrinsic value for APOLLO based on the Benjamin Graham's Growth Valuation?

To answer this question, we have to understand what is the component on Benjamin Graham's Growth Valuation and determine the value for each component

(1) Normalized EPS
Based on Jae Jun's writeup, we shouldn't take the EPS based on single 12 month period. It have to be adjusted to a normalized number by ignoring one time hugre or depressed earnings based on 5 year or 10 year history.





Above figure show that APOLLO's EPS was in uptrend mode and it have been growth at 10Yr CAGR of 7.89%. I am not intend to use the average EPS from pass 5 or 10 years as normalized EPS as it is a little too conservative for a growth company like APOLLO.

Thus, I decided to use the average of  T4Q , FY2013 and FY 2012 EPS . Based on this assumption, 0.334 have been selected as the Normalized EPS.

(2) EPS Growth Rate

Based on Jae Jun's writeup, we could just use the analyst 5yr predictions or, a regression of the historical EPS to project the following year growth rate.



APOLLO's EPS  have been growth at 10Yr CAGR of 7.89%, with a 5 year / 10 Year Multi-Year Growth Rate of 1.30% and 6.41% respectively. I am using the average of these 3 figures as my EPS growth rate, i.e. 5.20%

(3) Growth Multiplier

The “2 x G” is quite aggressive as Graham never experienced companies with growth rates of 20-30% which is common today (There was no Amazon or Facebook in Graham's time). So I tend to agree to  Jae Jun's writeup, and reduced the multiplier to 1.5 instead of 2.

 (4) No Growth P/E

I am using a no growth P/E of 8 (EY of 12.5%) instead of 8.5.

(5) 20 Years Grade A Bond Rate



Based on Yahoo Finance, the 20 Years Grade A Bond Rate should be 4.39%

From the (1) - (5), the intrinsic value of APOLLO can be derrived based on formula:-
V = 0.334 x (8 + 1.5g) X 4.4 / 4.39%, and I am using the BGG's worksheet on Financial Statement Analysis Template to perform the calculation.




From the calculation result, APOLLO's intrinsic value is 5.291. If compare to its share price of 4.980, it provide a 5.88% of MOS and 6.25% of Up Side.



Benjamin Graham's Growth Valuation on Financial Statement Analysis Template (v1.60)

I have created Benjamin Graham's Growth Valuation sheet on the Financial Statement Analysis Template. You can click here to access the said template on the One Drive. 

 As usual, the "V-BGG" will be auto pick all the required data after you filled in the purple colour input worksheet as per specified in Financial Statement Analysis Template. 

First and foremost, you will need to review the data setup sections, and then the worksheet will calculate intrinsic value based on different version of the benjamin graham's growth valuation:-
  1. The original version
  2. Required Rate of Return version
  3. Jae Jun's modificatiokn
  4. Self Defined Version
 and summarize it on the "Summary of Intrinsic value" sections.

 

Do review the Calculation Detail section in order to check out the how the excel calculate the intrinsic value. You can override the default value in the grey color cell.
 

 

Benjamin Graham's Growth Valuation Formula

  • The original formula, V = EPS x (8.5 + 2g)
    • V = Intrinsic Value
    • EPS = Trailling 12Month EPS
    • 8.5 = P/E ratio for 0% growth stock
    • g = growth rate for next 7=10 years
  • The formula was revised as Graham included a required rate of return, V = EPS x (8.5 + 2g) x 4.4 / Y
    • 4.4 = What graham determined to be his minimum required rate of return. When Graham was publicizing his work on 1962, the RFR is 4.4%.
    • Y = AAA corporate bond rate. This can adjust the 4.4% RFR to the present.
  • Adjust EPS (Based on Jae Jun)
    • Normalized EPS - EPS shouldn't be calculated based on single 12 month period.
    • It have to be adjusted to a normalized number by ignoring one time hugre or depressed earnings based on 5 year or 10 year history (depending on the company you are looking at)
    • EPS is never really a good number on its own as it is highly prone to manipulation with modern accounting methods
      • management will never understate earnings on purpose.
      • companies may follow accounting procedures which inflates earnings, they will never go out of their way to make it lower than it is.
    • Projected EPS - use the projected EPS for a pure growth stock with exponential growth like characteristics ONLY, else the stock value will become absurdly high.
    • EPS by analysts are also always over optimistic, so by following Wall Street guidance, you’re starting off on the wrong foot.
  • Adjust Growth Rate(Based on Jae Jun)
    • The growth is a big element of the overall valuation.
    • No Growth P/E - Depending on your conservativenes, you can change 8.5 to 7 ~ 8.5 (EY 14.3% ~ 11.8%)
    • Growth rate - you could just use the analyst 5yr predictions from Yahoo or other sites.Or, a regression of the historical EPS to project the following year is a method I like to use.
    • The “2 x G” however, is quite aggressive. So I’ve recently reduced the multiplier to 1.5 instead of 2.
    • This is understandable - Graham never experienced companies with growth rates of 20-30% which is common today (There was no Amazon or Facebook in Graham's time).
  • Corporate Bond Rate
    • Use the 20 year A corporate rate which is just above 6%. This provides a slightly more conservative intrinsic value than the 20 year AAA or AA.
  • Final Adjusted Formula, V = EPS x (7 + 1.5g) x 4.4 / Y
"It seems logical to me that the earnings/price ratio of stocks generally should bear a relationship to bond interest rates. Viewing the matter from another angle, I should want the Dow or Standard & Poor's to return an earnings yield of at least four-thirds that on AAA bonds to give them competitive attractiveness with bond investments." - Benjamin Graham


 
Happy hunting!
You may interest to view the previous release on the template:-
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