Bruce Greenwald’s Earnings Power Value EPV Lecture Slides

May 31, 2009 | Comments (9)

Written by

Jae Jun

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Stock Valuation Methods

Buffett and other respected investors mention that if you need a spreadsheet to determine a fair value of a company, the investment idea should be thrown into the pass pile. I only agree to some degree on this comment. It’s true that we should concentrating on no brainer investments rather than deworsifying into extra positions just for the sake of being invested, and while most people can read the financial statements to some degree, I’m sure many have trouble grasping all the numbers and coming up with a single dollar value as a fair intrinsic value number.

For me, as I run through companies, I always look at the free cash flow and cash flow statement first to determine whether the business is worth investigating. I can’t immediately come up with a number but I can determine whether the business is a good one. The stock valuation spreadsheets you find on this site was created to determine whether these stock ideas are cheap and to determine the buy and sell price range.

So far I use the following stock valuation methods:

Disadvantages of Stock Valuation Methods

Discounted Cash Flow

  • Need to estimate a growth rate. (Be conservative)
  • Need to project into the future
  • Does not work well for young, growth or cyclical businesses

Ben Graham Formula

  • Uses earnings which can always be inflated even if it is normalized
  • Projects using a EPS growth rate
  • Back tests have shown that the value is the upper range and overly optimistic

Ben Graham Net Net Formula

  • Calculates the value of assets only
  • Does not provide an upper range indicator
  • A snapshot valuation method

Multiples Valuation

  • Useless if business has no direct competitors (e.g. Mead Johnson Nutritionals. I’m having quite a difficult time trying to determine the fair value of the business.)

Earnings Power Value (EPV)

The GreenWald EPV Method

Greenwald EPV

Valuation Method – Greenwald EPV | Photo: Stockopedia

So even with 4 analysis tools in my toolkit, there is a hole that needs to be filled. Currently, I am still unable to value companies that are:

  • young (<5 year old)
  • cyclical
  • no competitors
  • growth

This is where I believe Bruce Greenwald’s EPV (or the Greenwwald EPV) method will come in handy. The stock valuation method allows the investor to value all of the above points.

A full detailed explanation of earnings power valuation in a practical step by step guide is available for Microsoft. The stock investment spreadsheet also allows you to perform a fully automated earnings power value stock analysis.

I was able to find Greenwald’s lecture notes from Columbia business school on the investment process and valuation which I’m sure you will all benefit from.

The EPV section starts from slide 16.

Greenwald EPV (Earnings Power Value) lecture slides

  • Ryan

    Hi Jae,

    I just found your website from other sties. This looks great. Very useful info and resources.
    By the way can you explain in details the difference b/w $15.95 spreadsheets and $21.95 spreadsheets? What financial statements are included?

    Thanks
    Ryan

  • http://www.oldschoolvalue.com Jae Jun

    Ryan, is the email address you entered correct? ryan2041 (at) mail.com ?? The email is bouncing.

  • Carl

    I have a question on one of the equation on slide #7, Maint. Inv = Depr + A, What is A ?

  • ANON

    A = Amortization

  • http://www.oldschoolvalue.com Jae Jun

    Thanks for answering Anon.

  • http://thecuriousinvestor.com The Curious Investor

    Not to split hairs, but I believe that Bruce Greenwald (in his book Value Investing: From Graham to Buffett and Beyond) actually describes his analysis as completely discounting any growth. That is, as a value investor, he’s unwilling to pay any premium for growth. EPV valuation simply assumes standardized earnings – “average” margins over “sustainable earnings” – multiplied by 1/WACC determines the Company’s current value. You’ll notice it’s very similar to a standard DCF analysis if you remove the growth rate and assume WACC as the discount rate. Just substitute “sustainable earnings” for “sustainable cash flow.”
    .-= The Curious Investor´s last blog ..Cash Conversion Cycle Case Studies =-.

  • http://www.oldschoolvalue.com Jae Jun

    Yep. I just finished going over the book a second time but there are some substantial differences. Greenwald doesn’t like to use DCF because of the assumptions and projections required.

    However, I ultimately see the intrinsic value of the business going up when the company is able to generate FCF. A company could have the highest sustainable earnings but could result in nothing if it never drops to the bottom line.

    This is the biggest problem I have with using the EPV. Enron had high sustainable earnings but had people looked to see whether that number turned into FCF, it would have been a completely different story.

    I’m still thinking hard about how I will implement this.

  • Mike

    Is there a detailed discussion somewhere here on how to search for stocks and what to look for? That is, more on the chapter “how to fish where the fish is”.

    Thanks

    Mike

  • http://appraisalvalue.wordpress.com Shamapant

    Jae,

    As to your worries about EPVs use of earnings vs FCF, I think EPV attempts to use Owners earnings in a way. Given, I just read the book and it’s a bit of a blur, but he adjusts normalized earnings for special charges to get a normalized EBIT and then adjusts for taxes,etc and SUBTRACTS CAPEX. The adjustment of D and A and CAPEX to match up to each other is what, in my opinion, makes this viable because it indicates that the normalized earnings ARE dropping to the bottom line….that’s at least what I understood of it, still have to go back through it again

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