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Home Questions Morningstar vs. Old School Fair Value Estimation

Morningstar vs. Old School Fair Value Estimation
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12:32 pm
October 20, 2009


Jae Jun

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LHR,

What values did you use? Did you just enter the ticker to get $66.90?

If you look at the post I wrote on fortunes 40 best stocks to retire on ACN was on the list and I came up with a value of $35 when it was trading at $29 at the time.

If you are trying to do a DCF with stable companies, you have to consider what cycle of the business it is in. In 2008 every company did terribly but you shouldn't use the 2008 numbers to calculate a fair value. You should normalize the numbers to a normal operating situation because you are looking at a company from an ongoing perspective.

The spreadsheet has a yellow FCF override box in the DCF tab where you can enter your estimate of FCF. A simple way would be to just take the median of the past 5 years and enter that number. It would provide an indication of how it has and may perform.

So to answer your question "Why would there be such a huge difference between Old School's and Morningstar's Fair Value estimation?" it is because using default values won't give you the correct range of results for every single stock. You have to adjust the FCF number, growth and discount rates.

There is a box where I provide the ability to change this very simply.

You can also refer to this article on discounted cash flow I wrote.

Onto the 3 pitfalls.

Cash flow projection.

Not a problem with stable cash flow generators. DCF and any other valuation method is all about knowing what technique should be applied to which company.

Capital Expenditure Projections.

Since I use the entire capex amount rather than trying to estimate the maintenance capex I won't be understating it so not a problem. Will turn out more conservative.

I've written about capex a couple of times.

http://www.oldschoolvalue.com/…..penditure/

http://www.oldschoolvalue.com/…..re-in-fcf/

Discount Rate and Growth Rates

http://www.oldschoolvalue.com/…..unt-rates/

You can see how I apply discount rates and growth rates in this AAPL stock valuation.

11:43 am
October 20, 2009


LHR

New Member

posts 2
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I was initially encouraged that according to this post http://www.oldschoolvalue.com/…..sic-value/  – it seemed that Old School's Fair Value Estimation was a bit more cnservative than Morningstar's.

I just purchased the premium spreadsheet and found that a major stock I own varies quite drastically from Morninstar's Fair Value.

Stock Symbol:  ACN (Accenture) Old School's Fair Value Estimate is $66.90 with yesterday's closing being $38.69.

Morningstar's Fair Value is $46 and that was recently raised from $37.  Below is a paragraph from their Valuation section:

"We are increasing our fair value estimate for Accenture to $46 per share from $37. The increase in our fair value estimate for Accenture is a result of an adjustment for the time value of money and better-than-expected operating performance. Despite this better performance, we still expect the company to face some head winds in the near term due to the current macroeconomic environment. The economic slowdown has forced companies to delay or postpone their IT investment decisions, which is expected to negatively impact Accenture's top-line growth. Further, Accenture derives approximately 45% of its revenue from customers in the financial services and manufacturing industries, which are at the center of the storm. Currency fluctuations are also expected to weigh on top-line performance as Accenture derives more than half of its revenue in foreign currencies. Our current forecast expects Accenture's revenue to decline 7.5% in 2009 before recovering to post positive revenue growth from 2010 onward. Overall, we expect revenue growth to average 3.1% during the next five years…"

So, my question is:  Why would there be such a huge difference between Old School's and Morningstar's Fair Value estimation?

Would that have any relation to the Top 3 DCF pitfalls listed on this investopedia article? http://www.investopedia.com/ar…..tfalls.asp 

If not, how could those 3 pitfalls be mitigated in your premium spreadsheet?

Cheers.
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