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
Summary
To summarize, the Tykr Fair Value Formula is essentially driven by profits. If profits are increasing, the Fair Value will increase. If profits are decreasing, the Fair Value will decrease.
If you log into Tykr and click on the Projections tab of a stock, you may see a comparison between these four fair value equations.
- Tykr Fair Value
- Rule #1 Fair Value
- Graham Fair Value
- Discounted Cash Flow
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