2. The estimated economic value (EEV)

 

  How to calculate a stock's EEV?

You surely heard about :

  The EPS (Earnings per share).

  The PER (Price-Earnings Ratio) or P/E. It is a kind of inverted rate of return
    (
Price / EPS).

Well, now comes the EEV / Estimated Economic Value.

It takes into account

  The projected EPS in 5 years (EPS 5)

  Multiplied by - not the present P/E - but a "primary" P/E (*).

  To which we add the dividends to be received (***)

EEV

=

EPS 5  x  primary P/E

+

5  x  (current) dividend

(*) The primary PER (= primary P/E) is shown in the table below.

It results from a 5-year actualized (**) calculation method, using present
and historical
rates of interest and inflation.

(**) Actualized means based on compound rates and discounting calculation
        tools
...)

(**) We add, as it is a premium for the shareholder, the dividends to receive during
        that 5 year delay.

Except specific cases, let us not complicate our life by discounting those future
dividends: let us reckon 5 times the presently known dividend.

 

  Primary P/E table

Horizontal scale:
inflation/deflation rate %

Vertical scale:
5-10 years bonds
gross interest rate %

At the crossing:
primary PER

- 2

-1

 

0

1

2

3

4

5

6

7

8

9

10

14,9

16,7

0

18,8

21,4

24,8

29,5

 

 

 

 

 

 

 

12,9

14,2

1

15,9

17,8

20,3

23,6

27,9

 

 

 

 

 

 

11,3

12,3

2

13,6

15,1

17,0

19,3

21,4

26,4

   

 

 

 

9,9

10,8

3

11,8

13,0

14,4

16,2

18,4

21,2

25,0

   



8,7

9,5

4

10,3

11,2

12,4

13,7

15,4

17,5

20,2

23,7

   


 

8,4

5

9,0

9,8

10,7

11,8

13,1

14,7

16,7

19,2

22,5

27,1

 
   

6

   

9,4

10,3

11,3

12,5

14,0

15,9

18,2

21,4

25,7

   

7

     

9,0

9,8

10,8

12,0

13,4

15,1

17,4

20,3

   

8

       

8,6

9,4

10,3

11,4

12,8

14,4

16,5

   

9

         

8,3

9,0

9,9

10,9

12,2

13,8

   

10

           

7,9

8,6

9,5

10,4

11,6

 

 

11

 

 

 

 

     

7,6

8,3

9,1

10,0

   

12

     

 

 

   

6,7

7,3

7,9

8,7

   

13

     

 

 

     

6,5

7,0

7,6

   

14

     

 

 

 


   

6,2

6,7

   

15

                   

5,9

Beware, in case of economic disorder, rates may be abysmal or Himalayan.

They give surrealistic primary PER (i.e. <1 or >50). Such rates are unstable,

thus desultory. That is why some boxes in the table are censored (empty).

  Calculating the EEV: an example

  See here a calculation example of a stock VEE, in Euros
       (Note: you can also use the instant valuation tool with your own data)

Current EPS (Earnings per share)   =

2,80

Projected EPS growth in the next 5 years (per year):

    thus the EPS will be multiplied in one year by 1,08, 

       and in 5 years by 1,08 x 1,08 x 1,08 x 1,08 x 1,08 (*) =

8%


1,4

EPS 5 (projected EPS in 5 years) = 2,80 x 1,47  =

4,10

Primary PER: with a 2 % inflation rate and 5 % long term
interest rate,
our above primary PER table gives a
coefficient equal to (rounded):

.
11

Current dividend:

1,20

EPS 5 (projected earnings per share in 5 years)
x "Primary" PER coefficient

4,10   
x  11   

.
45 

Current gross dividend
x
number of years

1,20   
x  5   

.
   6 

Total = EEV / Estimated economic value 

51 

(*) Those interested can look at the compound rates / present value calculations article

After looking at the economic value, now it is time to salt and pepper it
withthe behavioral elements.
This is the role of the image coefficient

separ

 This page last update: 26/09/15
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