the RIA analyst

RIAanalyst.com is proud to introduce HISTVAL(TM) to our repertoire of information services.The HISTVAL model uses proprietary financial modeling to project Fair Market Value (FMV) for a stock based on up to 10 years of fundamental data and valuation trends. Though the results of the model are then shown in chart form, with actual price action overlayed, this is not a technical analysis tool – these are not like bollinger bands or donchain channels that are solely based on historical price action. Rather, the Histval model is built around the Enterprise Value to Sales valuation ratio (EV/Sales), and incorporates projections for revenue, EV/Sales multiple, shares outstanding, and net obligations before common (net debt) in order to arrive at a fair value for the share price in forward years, and an expected return estimate for holding periods of 1, 2 and 3 years. This model can also be adapted to use EV/EBITDA, and other valuation metrics as well.

Over time we intend to round out our valuation tools with a peer comparables model, COMPSVAL(TM), and a discounted cash flow, CASHVAL(TM).

Note that no single valuation approach is perfect and its important to appreciate both the power and limitations of any methodology. A HISTVAL or other estimate of fair value or expected return should not be interpreted as a recommendation to buy or sell. You should always consult your financial advisor and be sure you understand the potential risks of any potential investment as well as its appropriateness for your specific situation.

Below is a step-by-step introduction to the RIAanalyst.com HISTVAL(TM) Valuation Model, using Pepsi (PEP) as an example:

Step 1: Because we are using a multiple of sales to estimate the fair value of the Pepsi enterprise, we start by forecasting operating revenue based on actual historical results, and current Wall Street estimates…

Step 2: Next we are going to project a range of possible or likely EV/Sales multiples for the stock based on historical trend. Companies trade at higher or lower EV/Sales multiples based on market participants’ assumptions about the firm’s profitability, growth potential, capital efficiency and its costs of debt and equity. Becasue these assumptions change over time as a company and/or its industry matures, we are much more interested understanding trend of EV/Sales, rather than a historical average or median…

Step 3: With projections for Sales and EV/Sales we obviously have the basis for a projection of enterprise value (EV = Sales * EV/Sales). But we’re trying to find the fair value of the common stock, which requires us to also project the amount of debt and other obligations (such as preferred stock), net of cash, to find the value of equity. We also need to project shares outstanding to find the value of equity per share. The trends in both shares outstanding and NetDebt reflect how good the company is at generating cash from its operations. A firm that doesn’t generate sufficient cash from operations must finance its activities and growth from increased bowrrowings and/or secondary offerings of shares. A firm that generates ample cash will have excess that can be used to offset or paydown debt, or to buyback shares…

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Step 4: Ok, now we can use our EV/Sales model and translate it into a Fair Value model using the following formula:

We use the median between our high EV/Sales model and our low EV/Sales model to establish our fair value estimate. We then use the midpoints between the estimate and the extremes to create a value channel outside of which you might say the stock is either over or undervalued, according to the model…

Step 5: Finally we add a view of dividend yield expectations and combine with our view of fair market value in the future to generate holding period return scenarios assuming it takes either 1, 2 or 3 years for price and fair value to converge…

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Finally we present the whole model in a 1pg formatted PDF:

We plan to continuously test, refine and improve on this model and hope you find the methodology sound and the results useful. We are open to and look forward to any comments or questions you wish may have. In the future you are likely to see HISTVAL as a basis for stock ratings, valuation opinions, or other commentary -  especially on in-the-news or widely held stocks.

You stay classy,
The RIA Analyst