Intrinsic Calculation Process - Check my work

I would like feedback from the forum if I am using the intrinsic calculator correctly on buffets book.

Financial source: Morningstar.com/key ratio tab.

I am using Book Value Per Share to get current book value and old book value. Is this correct?

I am finding the annual dividend by looking on the last year dividend payout. Is this correct?

Treasury information I am good with at this time.

I am going to go through my process as an example below, and I need someone to tell me if I am getting the right answer.

The stock I am analyzing is VSI

First part:
Current Book Value = 21.84
Old Book Value = 8.76
# of Years between Book Values: = 6
Average Book Value change (%): = 16.446048217425368

Second part:
Cash Taken out of business ($): 0
Current Book Value ($): = 21.84
Average Percent Change in book value per year: =16.446048217425368
Years:= 10
(Discount Rate) 10-year federal note (%): =2.31 ( the day I wrote this message that was the rate)

Intrinsic Value: $79.67

I look forward to your reply.

Best Answer

  • Answer ✓


    Hello, I am not sure about all your figures but quickly they look ok to me. You can always watch the video again as you use the calculator.

    I would be a bit more conservative in a few areas to get a more realistic calculation.

    Firstly they are talking about raising interest rates so I would raise the discount rate.

    Secondly your average change in book value seems high to me, if you just look at the last 3-4 years it seems more in the 5-10% range for revenue growth.

    Another thing was I was looking at the balance sheet and they seem to have increased good will a fair bit over the last 3 years. This tells me they have purchased a smaller competitor or two in the same market space. This could be a merger to actually improve company performance and diversity or simply to remove some of the competition and increase market share. In which case this could be the cause of the slightly slower growth in the near term as they would have paid some premium.

    Their cash levels are lower than historical. They also seem to increase short term debt in the near term which can negatively affect cash flow and growth but overall long term debt levels are low for the company. This would put them in position to increase growth with greater leverage in the future if they choose to.

    The question you have to ask yourself is compare them to competitors in the industries, then decide if they are better positioned, have a competitive moat, or are undervalued compared to peers.

    The supplement industry is very competitive and as of now mostly unregulated if the product is considered natural. I would read up about any potential change in regulations in the future as well market outlook.

    Seems like a decent company, although no dividend which is not uncommon for younger growth style business's. This means the only way they to get a return currently is off of capital gains.

    Good luck.

    G

Answers

  • Ghazel,

    Thank you for your insight. I am not looking to purchase stock for this company. I was only using their numbers to make sure that I understood the process and numbers to use the intrinsic calculator for companies I am interested in purchasing. I truly appreciate your insight into this company.
  • Remember the intrinsic value of $79.69 means this:

    For the next ten years if you buy the stock at $79.69 you can expect an annual return of 2.31%(discount rate)

    The next step is to play with the discount rate until you get to the current price. with a discount rate of about 14% you get the current price. This means:

    For the next ten years if you buy the stock at $25 you can expect an annual return of 14%(discount rate)
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