Hey fellow monkeys,
I was wondering if the per share value of a stock given its current fundamentals is reliable in terms of understanding whether it is undervalued or overvalued. For example, if I calculate the equity value divided by the shares outstanding of a company's stock using its current total debt and total cash, would that per share value be a somewhat credible number or would I have to do a DCF analysis?
Thanks!
How are you calculating equity value in the first place? Think of the formula for enterprise value (EV = debt + equity - cash); where are you pulling that equity value from? You could make an assumption of where the equity should be trading using a multiple and then compare to the trading value, but, in my opinion, it makes more sense to do a DCF using expected cash flows.
Once you get your equity value from the DCF, you can divide by the number of shares (careful with this, as stock options, etc., can alter the share count significantly) to get the equity value per share to compare to the market price.
I'm actually just using the enterprise value provided by financial websites for each stock and subtracting the total debt and adding the total cash to get the equity value.
You'll want to be careful then and make sure the websites are actually using their in-house estimates for equity value or if they pulled the equity value from the current market cap of the company. I don't know which websites you're looking at, but if they, for example, pulled the market cap from Google, then that's not helpful in your analysis. If they use their own equity value, then you are relying on their information to determine whether a stock is over or undervalued relative to current prices.
This isn't going to get you anywhere. The EV provided by the websites will just be based on debt trading at par, cash on balance sheet, and market value of equity. So all it does is reflect the current market valuation.
I don't know why, but I was struggling to explain it as clearly as you did. The only hanging question is maybe he's subscribed to some investment research websites that actually provide the valuations, but I was imagining it more being like you stated.
Thanks for clarifying, everyone! I suspected that it wouldn't be that easy to get the equity value per share unless I implement a DCF.
Though I was wondering, what is wrong with a current market valuation? Does it at least give a ball park estimate of whether a company's stock is undervalued or overvalued?
You're not getting it. Something is over or undervalued when your opinion diverges from the current market valuation.
Ok, that makes sense, but then what is the role of current market valuation in relation to the current stock price? For example, if the current market valuation is $120, but the current share price is $100, what does this mean?
The share price is the current market valuation. I'm not sure what you're thinking of.
I think he's referring to BVPS - this is just the book value of equity divided by outstanding shares. In the case you're mentioning, if the current market price of the stock is $120, it doesn't necessarily imply that the company is overvalued, because the market price of a stock takes into growth factors as well as supply and demand. When using a DCF, you are essentially finding the intrinsic value of the stock based on future cash flows.
In short, you can't use the equity value/outstanding shares formula to derive at a decision on whether something is overvalued or undervalued.
If that's what he's referring to, his terminology is dangerously wrong because he's misusing another commonly used term. But I don't think OP even knows what he's talking about.
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