Calculating Present Value: Should You be a Buyer?

Note: This was part of a project done for school in July 2012.

So here is an example from the spreadsheet using CIBC, the current potential winner.

1) CIBC has a current 4 month trailing EPS of 7.31. This is just their last current 4 quarters of EPS added up which you can find on Google Finance. Word of caution, I noticed some of Google Finances numbers are slightly off from the actual filings with SEDAR This is also their diluted EPS vs undiluted/basic EPS. Diluted is more conservative and takes into consideration any outstanding warrants, options, etc that if exercised would dilute the stock, and therefore bring the price down. If you go onto Google Finance, and check out the income statement you will see what I mean.

2) Next I found their EPS growth from 2001 to 2011. Then took the 10, 5, and 3, year average to get an idea of consistency. As you can see below CIBC was 179%, 30%, 97% respectively. You can get the numbers yourself from here http://www.sedar.com/ . It is Canadas stock market police and information database. All Canadian publicly traded companies have to file with them.

3) So here is the first assumption. CIBC has been growing earnings each year like crazy, as shown in 2. So I dont think it is unreasonable to expect an increase of 15% each year for the next three years. That means if the current EPS is 7.31. Then at the end of year one it will be 7.31 x 1.15 = $8.407. Then end of year 2 8.407 x 1.15 = $9.667. Repeat once more for end of year 3 19.667 x 1.15 = $11.12. For some background this means that they made $11.12 for EVERY share they have. The sum of the total earnings over that 3 years is $29.19 (just keep this in mind for later).

4) CIBC current P/E as of the close today is 9.99. This is calculated form the price of the stock - $73.03 divided by their EPS $7.31. Again Google might give something a little different because they use the current year EPS and not the 4 quarter trailing (sometimes). The average for the banks as whole over the last years is a P/E of 11. So for the next assumption we will assume going forward that CIBC will trade at 11 times earnings versus the current 10. In reality this number changes every day with the price and yes could potentially stay below 11 and affect our outcomes you can change the P/E numbers on the spreadsheet to see what effect this has. But it is a risk and assumption that has to be made. (If you put 10 in it still works out that it is currently undervalued) So assuming 11 TIMES earnings, the expected price in 3 years would be CIBCs EPS in 3 years TIMES the P/E. This will give a price of $122.30 (11 x 11.12). This is just like going on Google Finance today and multiply the P/E by its stated EPS.

5) BUT we have to keep in mind dividends. Currently CIBC is paying out $3.60 / share annually. Divide this by their EPS in year 3 and you get 0.324 (3.60/11.12). This is also known as a dividend payout ratio it just means what % of their earnings were paid out in dividends. This might be the trickiest part to get. So why year 3? Again, erring on being conservative. If you did that same thing with year 1 or 2 EPS then you get a higher ratio. Because now we use that ratio and multiply it by the SUM of all the earnings over that 3 years and get 9.543 (0.32 x 29.19). This is the total amount of dividends per share we will receive over the 3 years. If you add this onto the future stock price we calculated in 4 you get $131.70 (122.30 + 9.543). This might seem confusing. But we expect the price to be $122 PER SHARE at the end of year 3. We expect to receive $9.5 PER SHARE over that 3 years. Adding them together gives a total expected value for the stock at the end of year 3. Like I mentioned there are tons of ways to value a stock. This is just based off of Warren Buffets/Graham/Dodd value approach and is a very basic form. There are a lot of other criteria we could add in but I feel like that gets away from the course and becomes way too complex.

6) Now apparently Buffet would only buy a stock if he thought he would get at least a 15% return for each year he held it. So to determine what price today we need to pay for the stock: 131.70/1.15^3 = $86.63.

CIBC is currently trading at $73.

I havent thought about it much but I dont think that this takes into consideration reinvested dividends meaning we have some compounding going on. So overall this is a very conservative approach and is based on fundamentals. Any Qs just shoot em at me.

John.

John Walsh

Digitally signed by John Walsh DN: cn=John Walsh, o, ou, email=jwalsh10@hotmail.c om, c=CA Date: 2013.02.07 13:02:57 -05'00'