As mentioned on Investopedia.com, “There is no universal standard for calculating the intrinsic value of a company.”

The Tykr Fair Value calculation is inspired by Benjamin Graham and Phil Town but we made a few small changes. You may learn more about Phil’s calculations and principles in his books (Rule #1, Payback Time, and Invested).

As mentioned on the Calculations Overview page, if you find the fair value, MOS, and score are not 100% the same as Tykr, that’s okay. As long as you get pretty close, that’s what matters. The numbers may vary slightly because we use what’s called a regression analysis within the Tykr software, which smooths out the numbers. This is especially handy when looking at IPOs which have limited data.

Here are the calculation differences.

- Benjamin Graham Fair Value = (EPS
*(8.5+(1*g))*4.4)/Y - Phil Town Fair Value = (Share Price*(1+15%)^10)/4
- Tykr Fair Value = (Share Price*(1+Annualized EPS Growth Rate)^10)/4

With the Tykr Fair Value we created what we call a “Swim Lane” where the EPS Growth Rate will fall between 15% and 30%.

- If the Annualized EPS Growth Rate is equal or greater than 30%, the highest growth rate is set to 30%.
- If the Annualized EPS Growth Rate is equal or less than 15%, the lowest growth rate is set to 15%.

By adding this swim lane, we allow stocks that are consistently growing EPS much faster to be represented more accurately. In other words, if a weak stock is given a growth rate of 15%, why would we give a great business the same growth rate? That’s not an accurate representation of a stocks growth rate potential. Let’s use a sports analogy. Let’s say you’re a Football Coach (American Football) for the NFL and you have 3 quarterbacks on your roster. Are you going to look at each quarterback equally regarding game performance? If you did, than you would randomly start each quarterback on each given game day. The reality is, you’ll start the quarterback who has the strongest track record of scoring points and winning games. So going back to businesses, if a business has a track record of increasing it’s EPS year over year greater than weaker businesses, it should be given a higher rating, not an equal rating.

Overall, Phil’s Fair Value is a great start but it’s not a realistic projection of where a stock is going.

Here is some context on the data points used within the Tykr Fair Value calculation.

- We use the EPS growth rate over the previous four years. If a company continues to increase its profitability year over year without adding more shares, this is a great sign. We use the EPS Growth Rate over the Share Price Growth Rate because the EPS is a sum of the net income divided by the number of shares. Share price on the other hand can move based on emotions. That’s why share price growth rate is a misleading indicator.
- We use the “10-10 Rule.” As Warren Buffett states “If you are not willing to own a stock for 10 years, do not even think of owning it for 10 minutes.” Our Fair Value only considers buy and hold stocks. We’re not traders, we’re investors. We’re looking to make investments in stocks and let those stocks make us money through the power of compound interest.
- We use the “Rule of 72.” The rule of 72 determines the number of years it requires for an investment to double. For example, if you take 72 / 10% annual return, this means it will take 7.2 years for the stock to double. If you take 72 / 15% annual return, this means it will take 4.8 years for the stock to double. As Phil Town teaches, we move this number down to 4. Although this may appear slightly more aggressive than 5, it’s still highly accurate.

Equation: (Share Price*(1+Annualized EPS Growth Rate)^10)/4 = Tykr Fair Value

If the Annualized EPS Growth Rate is equal or greater than 30%, the highest growth rate is set to 30%.

If the Annualized EPS Growth Rate is equal 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 = 4 for the 15% minimum required rate of return

Data inputs you’ll require…

- Share Price
- EPS = EPS TTM
- EPS4 = EPS 4 Years Past
- 10
- 4

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 Description: 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

If the Annualized EPS Growth Rate is equal or greater than 30%, the highest growth rate is set to 30%.

If the Annualized EPS Growth Rate is equal or less than 15%, the lowest growth rate is set to 15%.

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: GOOGL (Google)**

Data inputs you’ll require…

- Share Price = $1,731
- EPS = 49.59
- EPS4 = 23.11
- 10
- 4

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 Description: 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+(1.1458))^(1/4)-1 = 21.03%

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: FB (Facebook)**

Data inputs you’ll require….

- Share Price = $277
- EPS = 6.48
- EPS4 = 1.31
- 10
- 4

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: 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 30%. So in this case we change the Annualized EPS Growth Rate to 30% below.

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: (277*(1+.3)^10)/4 = $954.67

The next few articles talk about popular but misleading calculations a lot of investors still rely on. These calculations include the P/E Ratio and P/B Ratio.