What is the Tykr fair value formula?
As mentioned on Investopedia.com, “There is no universal standard for calculating the intrinsic value of a company.”
The Fair Value is the estimated share price of a stock in 10 years.
Inspiration Behind the Tykr Fair Value Formula
The Tykr fair value formula is inspired by Benjamin Graham and Phil Town but with a few modifications. Phil Town’s method adds a more dynamic perspective, incorporating growth assumptions into the valuation. You may learn more about Phil’s calculations and principles in his books (Rule #1, Payback Time, and Invested). Graham’s approach, known for its rigorous and conservative stance, focuses on fundamentals to determine a stock’s worth.
Comparing Fair Value Equations
To understand how to value stocks, it’s important to compare different fair value formulas. Below is a comprehensive comparison of the various fair value formulas:
- Benjamin Graham’s fair value formula is expressed as (EPS*(P/E Ratio of 7% + 15%)*(Minimum Bond Rate of 4.4% * 100)/(AAA Bond Rate of 3%).
- Phil Town’s fair value formula is (EPS*P/E Ratio)*((1+AnnualizedEPSGrowthRate)^10)/4.
- The Tykr fair value formula, which is (SharePrice∗(1+AnnualizedEPSGrowthRate)^10)/4.
The Tykr fair value formula introduces modifications aimed at refining accuracy. Each formula offers unique insights, but the Tykr approach incorporates additional adjustments to better reflect a company’s potential.
The Swim Lane Adjustment
The Tykr fair value formula features what we call a “Swim Lane” to handle variations in EPS growth rates. This adjustment ensures that companies with extremely high or low growth rates are accurately represented. We cap the high-end EPS Growth Rate to 35% and the low-end EPS Growth Rate at 15%.
Fair Value Calculation Equation + Examples
Equation: (Share Price*(1+Annualized EPS Growth Rate)^10)/4 = Tykr Fair Value Formula
- If the Annualized EPS Growth Rate is equal to or greater than 35%, the highest growth rate is set to 35%.
- If the Annualized EPS Growth Rate is equal to or less than 15%, the lowest growth rate is set to 15%.
Where…
- Share Price = Current Share Price
- Annualized EPS Growth Rate = Annualized EPS Growth Rate over 4 years
- 10 = 10 years for the Rule of 10
- 4 = Conservative estimate
Data inputs you’ll require…
- Share Price
- EPS = EPS TTM
- EPS4 = EPS 4 Years Past
- 10
- 4
Equation 1
Equation 1 Description: We need to determine the total EPS growth rate over 4 years.
Equation 1: (EPS – EPS4)/(ABS(EPS4)) = Total EPS Growth Rate
Equation 2
The task for Equation 2 is to compute the yearly EPS growth rate across four years.
Equation 2: (1+(Total EPS Growth Rate))^(1/4)-1 = Annualized EPS Growth Rate
- If the Annualized EPS Growth Rate is equal to or greater than 35%, the highest growth rate is set to 35%.
- If the Annualized EPS Growth Rate is equal to or less than 15%, the lowest growth rate is set to 15%.
Equation 3
Equation 3 Description: Now we need to determine the Fair Value.
Equation 3: (Share Price*(1+Annualized EPS Growth Rate)^10)/4 = Tykr Fair Value
Example 1: Alphabet (GOOGL)
Data inputs you’ll require…
- Share Price = $1,731
- EPS = 49.59
- EPS4 = 23.11
- 10
- 4
Equation 1
Equation 1 Description: We need to determine the total EPS growth rate over 4 years.
Equation 1: (EPS – EPS4)/(ABS(EPS4)) = Total EPS Growth Rate
Equation: (49.59 – 23.11)/(ABS(23.11)) = 114.58%
Equation 2
For the purpose of Equation 2, assess the EPS growth rate on a yearly basis over four years.
Equation 2: (1+(Total EPS Growth Rate))^(1/4)-1 = Annualized EPS Growth Rate
Equation: (1+(1.1458))^(1/4)-1 = 21.03%
Equation 3
Equation 3 Description: Now we need to determine the Fair Value.
Equation 3: (Share Price*(1+Annualized EPS Growth Rate)^10)/4 = Tykr Fair Value
Equation: (1,731*(1+.2103)^10)/4 = $2,918.92
Example 2: Meta Platforms (META)
Data inputs you’ll require…
- Share Price = $277
- EPS = 6.48
- EPS4 = 1.31
- 10
- 4
Equation 1
Equation 1 Description: We need to determine the total EPS growth rate over 4 years.
Equation 1: (EPS – EPS4)/(ABS(EPS4)) = Total EPS Growth Rate
Equation: (6.48 – 1.31)/(ABS(1.31)) = 394.66%
Equation 2
Description of Equation 2 : We need to determine the annualized EPS growth rate over those 4 years.
Equation 2: (1+(Total EPS Growth Rate))^(1/4)-1 = Annualized EPS Growth Rate
Equation: (1+(3.9466))^(1/4)-1 = 49.13%
The Annualized EPS Growth Rate is 49.13% which is higher than 35%. So, in this case, we change the Annualized EPS Growth Rate to 35% below.
Equation 3
Equation 3 Description: Now we need to determine the Tykr Fair Value.
Equation 3: (Share Price*(1+Annualized EPS Growth Rate)^10)/4 = Tykr Fair Value
Equation: (277*(1+.35)^10)/4 = $1,392.37