Comments on: Earnings Power Value EPV Valuation Microsoft

By: Jae Jun

Jae Jun — Mon, 01 Mar 2010 05:14:39 +0000

Well 20% of D&A is added back first because I am assuming the 20% of hard assets creates earnings. And remember that D&A is not capex so it never is taken twice. Maintenance capex is calculated completely separately.

By: Borislav Koev

Borislav Koev — Sat, 27 Feb 2010 12:08:25 +0000

Thanks for your answer, I should read the book…
However, something is still bothering me:
you said that 80% of D&A should be enough to cover the maint. CAPEX (I agree), but then the next step in the analysis is to “subtract maintenance capital expenditures and divide by the discount rate.”
This means that you count the maint. CAPEX twice!!!

Thanks again!

By: Jae Jun

Jae Jun — Sat, 27 Feb 2010 09:08:02 +0000

The best way would be to read the book but to answer simply

1. EPV is for finding the earnings power. SG&A and R&D add to the future earnings but not 100% of it. So Greenwald suggests you add 25% as a conservative measure.
2. Same reason as above except we are dealing with capex when adding back D&A. If I add back 20%, I am assuming that the remaining 80% will more than cover the maintenance capex.
It’s on page 125 of the book. Last paragraph on the page.

By: Borislav Koev

Borislav Koev — Sat, 27 Feb 2010 02:04:55 +0000

Jae

Thanks for your post, it’s great but I have some questions:

- In step 2 you “add a certain percentage of SG&A and R&D back to earnings. I prefer to keep things simply by adding back 25% for both.”
What is the logic behind that?

- When calculating Earnings Power Value in step 4 you “add back 20% of D&A as I do”. Why only 20% and not the whole amount?

Thanks!

By: Payback Time Investment Book Review

Payback Time Investment Book Review — Thu, 25 Feb 2010 23:58:59 +0000

[...] Phil uses is a very simple method. He doesn’t use DCF valuation, Graham based formulas or EPV like I do. It’s very simple math, or you can use the tools on his site, but to summarize the [...]

By: How to Invest: Research and Valuation Process | Old School Value

How to Invest: Research and Valuation Process | Old School Value — Wed, 17 Feb 2010 09:33:47 +0000

[...] valuation methodology is rooted in the modern Graham and Dodd approach so I work with asset values, earnings power value (EPV) and view growth as either a margin of safety or buying it for [...]

By: Jae Jun

Jae Jun — Mon, 08 Feb 2010 17:57:23 +0000

By using FCF numbers, you wouldnt be able to include the other aspects of the business which adds to the earnings power. He makes a valid point that R&D, SG&A and other line items need to be added back. If you did this just FCF, you would either be double counting it or not considering the business as a whole but rather just the profitability.

By: Alex

Alex — Sun, 07 Feb 2010 12:00:53 +0000

Hello Jae,

I’ve also read Greenwald’s book.

What I didn’t get was why didn’t he use FCF/Owners Earnings instead of adjusted Ebit. He seems to make a load of loose estimates, where he could have started with FCF and made the adjustments for the biz cycle etc.

Thanks

By: Jae Jun

Jae Jun — Fri, 01 Jan 2010 10:10:01 +0000

Hi David,

Which multiplier of 2 are you referring to? I made the Graham adjustments and published it after I wrote this article btw.

By: david

david — Wed, 30 Dec 2009 16:28:57 +0000

I was just wondering why you used 2 when multiplying the growth rate in calculating intrinsic value instead of 1.5 as it is in the graham intrinsic spreadsheet? When do you consider using the multiplier of 2 in calculations? Any thoughts are greatly appreciated as I am just beginning my investment journey.