Sticker and MOS Price Calculations
In this article we descibe in detail how do we do Sticker and MOS Price calculations in the
Stock Analyzer.
Phil Town says: "The Sticker Price of any business is based on its future EPS and future PE. In other words, if we can figure out
what a company's future EPS and PE numbers are going to be in, say, ten years, we can multiply those two numbers together and
determine its future price in ten years and than, from that, work backwards to determine its Sticker Price today."
In the Stock Analyzer you can find 4 projection types for each computation:
Pessimistic, Moderate, Optimistic and "My Numbers". You shall find the difference between used algorithms
in this document. For some companies the final numbers will be the same, for others, the numbers will be quite different.
Every time when Stock Analyzer adjusts algorithm for the specific computation type, it
will produce a descriptive note, which you can find in the bottom of the Sticker Price section.
Please use "My Numbers" column in order to run your own numbers. You can also change "Rate of Return" and "MOS Price
Percent" values for all projection types.
Input Values
Current EPS
We do not have to do any fancy calculations to get the current EPS, which reported on most financial websites and easy
to obtain. In the Stock Analyzer we take current EPS from the moneycentral.msn.com.
Estimated Future EPS Growth Rate
First of all, EPS Growth Rate is an estimate. Phil Town calls it also "the Rule #1 Growth Rate".
Phil Town says: "It makes sense that to predict the future EPS growth rate on a business, we have to look at
historical growth rates to base our decisions." And very important: "future EPS growth is actually NOT the
historical EPS growth rate, but rather historical equity growth rate."
In order to calculate Estimated Future EPS Growth Rate we have to analyze the following numbers:
- Historical Equity Growth Rate - calculated as an average of all available historical Equity Growth Rates
(Stock Analyzer, "Growth Rates" section, row "Equity").
- Historical EPS Growth Rate - Analyst Recommendations provided by Zacks Investment Research. You can find
this value in the moneycentral.msn.com, "Earnings Estimates", "Earnings Growth Rates" section, "Last 5 Years" value.
- Forward EPS Growth Rate - Analyst Recommendations provided by Zacks Investment Research. You can find
this value in the moneycentral.msn.com, "Earnings Estimates", "Earnings Growth Rates" section, "Next 5 Years" value.
For Pessimistic projection we calculate Estimated Future EPS Growth Rate as a lesser of the described values,
for Moderate and Optimistic projections we calculate it as an average.
As a conservative projection we should not expect Estimated Future EPS Growth Rate to be very high. That is why for
Pessimistic computation we limit Estimated Future EPS Growth Rate by 40 and for Moderate by 50.
Future PE
PE is a ratio that helps us convert earning per share into a price per share number. The basic formula is this:
PE * EPS = Price
"A quick rule of thumb for figuring the PE is to double the Rule #1 growth rate. We'll call this the default PE."
However, this is not enough. In order to be sure, we need to compare default PE with the historical PE. If
the historical and default PE are not the same, we'll use the lower of the two when making calculations. You can find any
company's average historical PE on any financial website. Usually, you can find at least 2 numbers in the "Price Ratios"
section: PE Ratio High and PE Ratio Low. We are using PE Ratio Low number as more conservative.
In order to calculate Future PE we have to analyze the following numbers:
- Default PE - double the Rule #1 growth rate ([Estimated Future EPS Growth Rate] * 2).
- Historical PE - you can find this value in the moneycentral.msn.com,
"Financial Results / Key Ratios", "Price Ratios" section, "P/E Ratio 5-Year Low" value.
- Forward PE - Analyst Estimates provided by Zacks Investment Research. You can find
this value in the moneycentral.msn.com, "Company Report", "Earnings Estimates" section, "Forward P/E" value.
For Pessimistic computation we use the lesser of the Default PE, Historical PE and Forward PE.
For Moderate computation we check if the Default PE in the same range as analyst estimates we use the average of these
three numbers. If the Default PE is more than twice greater than Historical and Forward PE we will limit Default PE by greater of
Historical and Forward PE. For Optimistic computation we use the average of the Default PE, Historical PE and Forward PE.
Table of comparison
| Equity Growth Rate |
The average of all available historical Equity Growth Rates (Stock Analyzer, "Growth Rates" section, row "Equity").
Exception:
If calculated Equity Growth Rate is negative, 1% used instead.
|
| Estimated Future EPS Growth Rate |
The lesser of Historical Equity Growth Rate, Historical EPS Growth Rate and Forward EPS Growth Rate.
Exceptions:
- If calculated value is negative, 0 used instead.
- Calculated value limited by 40.
|
The average of Historical Equity Growth Rate, Historical EPS Growth Rate and Forward EPS Growth Rate.
Exceptions:
- If calculated value is negative, 1% used instead.
- Calculated value limited by 50.
|
The average of Historical Equity Growth Rate, Historical EPS Growth Rate and Forward EPS Growth Rate.
Exception:
- If calculated value is negative, 1% used instead.
|
| Future PE |
The lesser of Default PE, Historical PE and Forward PE
Exception:
- If calculated value is negative, 1 used instead.
|
The average of Default PE, Historical PE and Forward PE
Exceptions:
- If calculated value is negative, 1 used instead.
- If the Default PE is more than twice greater than Historical and Forward PE, the greater of the Historical and Forward PE will be used instead.
|
The average of Default PE, Historical PE and Forward PE
Exception:
- If calculated value is negative, 1 used instead.
|
# of years
Phil Town says: "Rule #1 uses ten years for the future for two simple reasons:
- The 10-10 Rule: We never buy a business for ten minutes if we are not willing to hold it for ten years.
- Practically: Twenty years is too far into the future to do any sort of reasonable predictions, and five years
is too short for a long-term hold.
However, in the stock2own.com you can find all future estimates calculated for 5 and 10 years. There is no special
motive for that, except of give you a better understanding of the stock price dynamic. And remember - all this
computations are projections!
Rate of Return
"The Rule #1 minimum rate of return is 15 percent per year. The Sticker Price is the maximum amount we can pay and
still get that 15-percent return on your money over the next ten years."
"Write that down in your brain: 15 percent is our minimum acceptable return per year. Anything that looks like
it's going to pay us less, we do not buy."
You can change Rate of Return and run your own numbers, of course. Just adjust rates and click "Calculate" button.
MOS Price, %
MOS Price states for "margin of safety" Price. That is why in most cases MOS Price is 50%. Just like Phil Town says:
"Do not forget: we never pay the Sticker Price! We always want to buy a dollar of value for fifty cents."
However, sometimes, especially if you are really confident in the stock, you can change default value of 50% to something
more risky, 70% or even 80%, fo example. Go ahead and change this number if you want!
Results
Future EPS
Once we know the Current EPS and EPS Growth Rate for the defined time period ("number of years"), we can calculate
Future PE using the Growth Rate formula.
Future Price
Once we know the Future EPS, we can figure out the future price of the business per share - the future market
price - by using a PE, a multiple of earnings. Simply multiply the future EPS by the future PE.
Sticker Price
We can figure out what the business's Sticker Price is today by utilizing our future market price and minimum
acceptable rate of return. Again we'll use the Growth Rate formula.
MOS Price
Do not forget: we never pay the Sticker Price! We always want to buy a dollar of value for fifty cents.
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