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Glossary
This is a glossary of terms as used by Intrinsic
Value Equity Management, LLC. They are provided to give readers and clients a precise
understanding of the concepts and calculations used in our research reports See
below for a new metric - Free Cash Flow Annuity
- Intrinsic Value -- The present value of
the operating cash flow stream (Net Operating Profit After Tax minus change in Total
Capital) discounted at the sector’s or company’s Cost of Capital (see
below). Also known as Enterprise Value.
- Current Enterprise Market Price -- The
aggregate market value of all of a company’s or sector’s securities outstanding,
including debt, preferred and equity.
- Current Equity Market Price – The
market value of a company’s or sector’s Common Stock Outstanding.
- Free Cash Flow
–
Net
Operating Profit After Tax minus Year-to-Year change in Net Capital.
- Net Capital –
Net Working Capital plus Long Term Assets.
- Valuation Drivers --Factors which
determine the course of the company’s (or sector’s) profits for a long time into
the future. These include Sales Growth, Profit Margin, Cost of Capital, Capital
Turnover and other elements which determine operating cash flows. These are the
major, but not the only valuation drivers:
Growth Rate -- Growth in Sales or
Revenue
Cost of Capital -- The
weighted-averaged cost of: common equity, preferred equity and debt (after tax) of the
individual company or sector. The cost of debt is the average interest rate for all
the company’s or sector’s debt instruments over the forecast period. The
cost of equity is the average total return demanded by an equity investor to invest in the
company or sector. The cost of equity is assumed to be the same for all companies
and to be driven by personal income tax rates, inflation expectations and the long-run
historical difference in real, after-tax returns between equities and bonds.
Profit Margin -- Net Operating
Profit After Tax divided by Sales.
This is different from EBIT Margin which is EBIT
(Earnings Before Interest and Taxes)
divided by Sales.
Capital Turnover -- Sales
divided by Average Net Capital
- Current Stock Price per Share -- Recent
closing price of a share of a company’s or sector’s Common Stock
- Current Debt per Share -- Total
reported debt plus the present value of non-capitalized operating leases divided by
current shares of Common Stock outstanding
- Current Enterprise Value per Share
– The Enterprise or Intrinsic Value divided by current shares of Common Stock
outstanding
- Intrinsic Value of Equity per Share --
The Intrinsic or Enterprise Value minus the market value of total debt, then divided by
current shares of Common Stock outstanding.
- Adjusted Intrinsic Value of Equity
--The Intrinsic Value of Equity adjusted to reflect the impact of dividend payouts and of
future stock buybacks presumed by the model to use excess operating cash. The
adjusted intrinsic stock value is the net present value of thirty years of cash flows to
the equity investor discounted at the cost of equity. The investor cash flows will
consist of dividend payouts for the first twenty nine years and the sum of the dividend
and warranted stock price per the-then-current number of shares. The adjusted
intrinsic value is, therefore, equal to the maximum price an investor should be willing to
pay for the stock today in order to receive a total return equal to the cost of equity.
- Simple Return --The non-compounded
interest rate which an equity purchaser would earn by holding the stock for a specified
period of time assuming purchase at the current market price and ending with a future
Intrinsic Value of Equity per Share.
- Compound Total Return--The interest
rate which an equity purchaser would earn by holding the stock for a specified period of
time and re-investing dividends annually at the then Intrinsic Value of Equity per Share.
- Equity Investor Internal Rate of Return
-- The return which an equity purchaser would earn by holding the stock for 30 years,
collecting all dividends and selling the stock at the Terminal Q Ratio at the end of
thirty years
- Free Cash
Flow Annuity - The
Free Cash Flow
Annuity is calculated by taking the most recent annual Free Cash Flow (defined as Net
Operating Profit After Tax minus Year-to-Year change in Net Capital) and dividing it by the
current Long Term US Treasury Yield. This measure says "Ok, so if I never grow my
current Free Cash Flow another nickel for the rest of time, how much is my stock worth
using the Treasury yield as the discount rate?" This is a very conservative measure
of intrinsic value. Any time you find a stock selling below that price, pay attention
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