We are definitely going to stumble on the same companies!

Intrinsic value is the value of the cash that can be taken out of the business during its remaining life. If the business is going to break-up tomorrow, the intrinsic value would be the break-up value. If it is going to operate for ten years, the intrinsic value would be the cash it can produce and its break-up value.

Take a look at this series of posts: Calculating the Value of a Business. Hope that helps!

Peter: My web designer has implemented a new system for me to minimize spam. The fewer hurdles I put in front of people (e.g., CAPTCHA, registration), the better (I think) our community will be. Of course, if the spammers get out of control, I’ll have to do something more.

so I have been able to work out how to get the historical data for the closing prices of a company stock price into a chart, using Excel. However, what is really alluding me is what exactly you are using for intrinsic value, and how you work it out for historical data. I thought Intrinsic Value was the Shareholder equity, what would the share holders would get if the company was to close…But then in the comment above you state you use the Freecash Flow I am probably just a little out of whack with what intrinsic value exactly is…..is it Shareholder Equity + FreeCashFlow?

Then finally and this is where I am proabably going most wrong is where do you get the data for number of historical shares issued?

Sorry to be so dull on this, but I am still very much learning and feel I am very much empowered by your teachings but can only branch out to my own analysis if I truely understand if I am doing it right. Thnaks for your patience.

Stuart

Discount Rate: I used the 9% discount rate because it fits nicely into the buy $1 worth of a business for $0.50 model. The 15% discount rate would change that to buy $1 of a business for $0.75 and people didn’t seem to like that.

Your discount rate isn’t all that important. What matters is that your data and reasoning are correct.

Graphs: I calculate the intrinsic value for the company each year shown and plot it against the stock price. For the early years, I use the actual cash flow of the business so I get a more accurate actual intrinsic value. For the later years, I incorporate my growth assumptions because, well, we don’t know exactly what the future will hold yet.

Pretty Charts: Erik, I plot it all in Excel and then import it into a photo editing software I have. Snip, Crop, Resize and boom – pretty graphs for the website!

How do you make those pretty charts?

thanks

erik

Your comments remind me of an article I read regarding JNJ and its yield.

Provided that you did manage to buy it at a 9% discount and with the current yield being 2.45% at first glance you would think that your annual return would be 11.45%.

However, if JNJ continues to increase its yield like it has been doing throughout its history, your return will actually increase yearly as well. It may only be 11% the first year, but if you are long, the return could well be 15-20% eventually.

Very satisfactory in my opinion. So the lure of blue chips for me is the actual yield and whether it will continue to increase.

P.S. Let’s try not to sit next to each other when we’re high on viagra.

This hit the spot for me. I’m always nervous of the larger companies, ABT, GE, JNJ, MMM etc. Like you said, how much growth is in these companies. But, buying them when they go on sale knowing you’ll get 9% of growth a year and if they have a yield over 2%, your getting an 11% a year return from a blue chip. Not bad if the sale ever comes.

I see it all the time especially in forums and some blogs, they say things like, JNJ is a buy at any price, your buying the brand. I disagree somewhat and your post explains part of the reason why.

FWIW, GE is yielding 3% since the share price is off another 3% today. Sounds like a sale to me………..now about that viagra.

if possible tell me how you go about generating the graph graphics you show for Price against intrinsic value. I have tried importing the data from graphs online, but Excel, doesn’t like Flash and Java graphs for data that most sites use…..so how do you plot the share value over the years, where do you get the data?

Many thanks

Stuart