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What's any given company's stock worth? The immediate answer is easy: Whatever someone will pay for it right now. But the fuller answer, one that accounts for what today's market might not see, is much more difficult to come up with -- and is every bit as much art as science. Thankfully, the tools to help with the mathematics keep getting better. A very good, free one available on the Web that's definitely worth checking out is on ValuePro.net.
This is a surprisingly sophisticated calculator that allows investors to work through their own valuation of almost any stock. It's the descendant of some packaged software I reviewed favorably last year (see BW Online, 6/18/99,
"Anyone of Average Intelligence Can Value a Stock"). Now that the calculator is on the Web, it's much more accessible.
How does it work? By following the "discounted cash flow" method of estimating a stock's inherent value, an approach used by many Wall Street pros. Naturally, that way of valuing stocks isn't perfect -- if it were, a lot more of us would be recumbent in Fiji. Nor is this tool without fault. Most glaringly, because it's offered for free and the site's sponsors need to keep costs down, stock prices aren't as up-to-date as they could be. Also, like every forecaster, this software makes certain assumptions, such as how fast a company will increase its revenues and earnings, before it can come up with its answer.
FINE TUNING. But beware! As the small group of programmers and finance professors who designed it readily concede, "Garbage in, garbage out." In other words, bad assumptions will yield a wrong answer. "If a figure comes up for a certain input that is either highly implausible or looks wrong, indeed it may be," the designers caution.
But the beauty of this calculator is its flexibility and transparency. Assumptions and definitions are on display for anyone to see or modify. "If a valuation is way out of line, figure out where the program may have strayed, and correct it," the designers urge. Since it's free to the public, and the site displays no advertisements except for packaged software and a book, that strikes me as a reasonable deal.
I used Microsoft to test it out. In a little window on ValuePro's home page, I entered MSFT, the ticker symbol for Microsoft. Then, I clicked on a blue button labeled "Get Baseline Valuation." In a few moments, up popped a new screen with 20 factors listed for Microsoft, including number of shares outstanding, net operating profit margin, and its no-so-current stock price. The latter, listed as $78.50 -- a level it hasn't seen since mid-summer -- was plainly out of date. So I entered $56, a more recent quote, and clicked on the "Recalculate" button.
RESEARCH IS VITAL. At the top of the screen was ValuePro.net's answer: Microsoft is worth $89.14 a share. You might take or leave that conclusion, of course, but it's worth first clicking on another button, "Cash Flow Details." A new window appears showing, year by year, how the program reckons the cash flow from Microsoft's future business. If you disagree with its estimate, you can click on yet another button, "Custom Valuation," and in a new window you can alter, year by year, the values for such variables as operating profit margin and tax rates.
Naturally, estimating many of those future variables is no easy task in itself. For example, when I tested the calculator on American Italian Pasta (PLB), a company I examined recently (see The Barker Portfolio, Oct. 9, "Small, Prosaic -- and Promising"), I found that changing just one variable -- the company's rate of capital investment -- made a huge difference. The calculator, drawing on the company's past reports, plugged 33.6% in the "Investment Rate" field. Based on that and the other factors, the calculator judged the stock to be worth just $4.17 a share.
But from my research, I suspect that capital spending will be tailing off. I "guesstimated" it at 20% and asked the calculator to run its numbers again. With that change, it rendered a far different judgment on American Italian Pasta's value: $41.35 a share.
Clearly, this calculator is no black box full of magic. It has to be fueled with your own research plus a healthy dose of common sense. Commendably, the ValuePro.net site also has plenty of well-written background material on the theory behind the discounted cash flow method and how it works. If you're struggling to do something similar with a pencil and paper, or with Excel, try this instead.
Barker covers personal finance in his Barker Portfolio column for Business Week. His barker.online column appears every Friday on BW Online Edited by Patricia O'Connell
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
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