Warren Buffet's "Owners Earnings" as a valuation method
I have been reading up on my Buffet's in the last weeks and came across his highly quoted valuation method, using what he calls "Owners Earnings". The formula for this is;
(a) reported earnings plus (b) depreciation, depletion, amortization, and certain other non-cash charges such as Company N’s items (1) and (4) less (c) the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain its long-term competitive position and its unit volume.
Has anyone played around with this? If you forecast "Owners Earnings" and discount them back to estimated present day value, are you supposed to subtract net debt from this value? The formula does not include debt service, even though it accounts for interest payments created by said debt? Appreciate it if someone can help me on this. I have searched the internet for awhile, and every article or blog just cites the formula and some nice quotes, without actually breaking it down or explaining the implications of it.
Thanks!
This is just a normalized levered FCF figure. If you wanted to project this out, then you would just discount using cost of equity.
Thanks,
I might be wrong, but shouldn't you then also subtract the debt repayment from this in the formula? Or the net debt from the Present value?
(On a side note, Buffett & Co have said something like; they are using just the 30-year treasury as the discount rate or smth. As an opportunity cost of sorts.)
I'm pretty sure that treasury quote is from back when the 30 year had a double digit nominal rate of return. Don't subtract debt. The figure he is talking about is supposed to give you an idea of how profitable the business is from operations (basically just revenue, expenses and capital items)
No, you don't subtract debt repayment nor net debt.
i.e. Does this then give you Equity value or enterprise value if you do not subtract the debt at any point, but take into consideration the interest? Confused as to how you calculate the estimated value per share from the PV
Ok, thank you. Makes sense with the 30-year treasury.
Suppose you wanna compare the calculated value estimate to per share price, just divide the present value by the number of shares then? Or compare it to EV?
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