What are your thoughts about PG now? I value it around $77/share, or $224.5B. This is based on a 10-year normalized pre-tax operating margin of 21.8%, and an after-tax margin of 15.3%.

I calculated a WACC of 5.7%, or a normalized P/E of 17.54. Total revenue for 2008 was $83,503. Currently, the company is trading at $51.21/share, or $151B.

This looks like a MOS of at least 34%. Thanks in advance for your response.

Great site! Your explanations are clear and concise. One question: how do you make the price follows value charts? Do you create historical intrinsic value by projecting 10 years into the future or do you use the actual growth rates in cash flow for the past period (ie, in the chart listed above do you use actual FCF growth from 1993 to 2007 to calculate the 1993 historical value)?

http://www.gurufocus.com/ListGuru.php

What do you think of these companies and how do you value banks?

Thanks for the great blog!

For the most part, the markets are generally efficient. In plain English, that means that, for the most part, the stock markets price businesses around their intrinsic value. At the end of the day, the stock market is nothing more than a place to buy and sell businesses, and those businesses are often fairly priced.

As a business grows, its value grows. As its value grows, its price follows. It is simple supply and demand. People are generally not willing to sell a $1 business for less than $1, nor buy that business for more than $2. When the business grows to be worth $1.50, the offers to buy and sell move accordingly.

That said, from time to time in the short term, the markets can do crazy things. Because stock owners are generally driven by greed and fear, they are often irrational and may sell a $1 business for $0.50. It doesn’t happen often, but enough.

Eventually, when that $1 business grows to be worth $1.50, people realize their mistakes and are willing to pay $1.50 for that business again.

How do we know that the mispriced business will regress to the norm? Remember that every single stock trade is a business transaction. If a company is priced too cheaply, it will be an acquisition target or will start privatizing (essentially buying its own money for 50% off). If a company is priced too high, people will eventually “come to their senses” and stop buying at such high prices. And then the supply and demand rears its ugly head and the stock price heads south.

Take a look at the Adobe example in this post. The truth is that PG and Adobe are two of the bazillion examples of price following value. It has been that way for the last 100 years, and there is no reason to believe that anything will be different 100 (or five) years from now.

Hope that helps. As always, post if it doesn’t!

Thanks,

Robert