How to Value Equities Using Benjamin Grahams Simple Formula! - Example SATS Singapore

We just finished reading "The Intelligent Investor" by Benjamin Graham and we will distill the important points for our dear readers. Actually, we didn't really agree on some of Benjamin's methodology because some of it was purely rule of thumb. BUT....given that he has "reproduced" some pretty fine students, see below table and compare their performance with our Dear Aberdeen Fund Managers and Dear Fidelity Fund Managers from Fundsupermart Singapore, we have becomed believers. Shameful.....still taking management fees somemore!
Read here on what Warren Buffet say about such people.

Benjamin Graham came up with a simple rule of thumb formula to find the intrinsic value of a stock. (Seriously, don't ask us how its derived...its baffling! )

Intrinsic Value per share= Current ( Normal) Earnings per share X (8.5 + twice the expected annual growth rate of earnings per share)

Take note that (Normal ) means one-off , extraordinary items that inflate or deflate the earning for that year are excluded. These extraordinary items refers to, for example, currency gains, sale of property ( non-property company), or anything that is earned/loss from activities not in the normal course of a company's business. The expected annual growth rate of earnings is the growth expected over the next 7 to 10 years.

Let's use it on Singapore Airport Terminal Services shall we!

We pulled the data out from Reuters ( let's assume reuters is correct) You can get the reuters data from http://www.reuters.com/. ( thats if you believe in their data!) Look at Diluted EPS Excluding ExtraOrd Items. Note that we use Diluted EPS instead of Basic EPS as the former is a more accurate reflection on the ownership of a company. Read here for a better explanation.
This data has already excluded extra-ordinary items therefore it is "normal".

Expected Annual Growth rate of SATS earnings per share = 0! ( based on the above. It might be negative too.. but let's be good shall we! This is up to your assumptions. Garbage in Garbage out!)

Current (Normal) Earnings per share = 0.179

Intrinsic Value per share = 0.179 X ( 8.5 + 0) = $1.512

Current value now as of 24 Nov 2008 = $1.37

Wow...let's go chiong and buy! Wait. Benjamin Graham also mentioned about the Margin of Safety! So is $1.512 - $1.37 = $0.142 a good discount and sufficient as a Margin of Safety?? Use your own judgement!.

As Graham once wrote: " You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

(Updated 25 Nov 2008, on a commenter's comments on using the weighted average of earnings per share for 3 years instead of just the most recent year's earnings per share, we thought about it, and we think it actually makes sense to use a weighted average, as some industries are highly cyclical. A weighted average will smooth earnings out through the years. Hmm maybe a simple average will suffice to keep it simple.... )

Important: The objective of the articles in this blog is to set you thinking about the company before you invest your hard-earned money. Do not invest solely based on this article. Unlike House or Instituitional Analysts who have to maintain relations with corporations due to investment banking relations, generating commissions,e.t.c, SGDividends say things as it is, factually. Unlike Analyst who have to be "uptight" and "cheem", we make it simplified and cheapskate. -The Vigilante Investor, SGDividends Team