Using Quarterly or Annual results, how to calculate the target price, i.e future valuation of stock?
There are multiple methods to arrive at future stock price calculation.
Method 1 -
- identify the growth rate of Earnings Per Share.
- estimate the future EPS. Say after 5 years
- Estimate the average PE of last 5/10 years
- Calculate the stock price after 5 years as - FUTURE EPS * ESTIMATED PE
- Calculate the present value of the stock (use discount percentage to calculate the Present Value)
- Reduce the price further by some margin of safety
All the above steps are estimates and common sense is very much needed. Be conservative rather than optimist.
2nd Method - This is complex method. None of the method is fool proof. Sometimes method 1 is more faster and accurate.
- Identify the free cash flow generated by the company
- Predict the free cash flow for next years
- Select the discounting factor
- Compute the present values of all the future cash flows
- Compute the terminal value (value of enterprise which generates x cash flow)
- Sum all the present values - that’s enterprise value
- Divide enterprise value by the number of shares outstanding - gives the estimated value of share price.