External factors affecting an industry’s growth include macroeconomic, technological, demographic, governmental, and social influences. Macroeconomic Influences Cyclical or structural trends may have significant effects on the demand for an industry’s products or services. An industry’s sales and profitability may be…

A thorough company analysis will involve an examination of the company’s financial position, products/services, and competitive strategy (a company’s plans for responding to external threats and opportunities). There are two primary competitive strategies: a low-cost strategy and a product/service differentiation…

When a security’s current market price is approximately equal to its value estimate, the security is considered to be fairly valued. Conversely, when the market price exceeds the value estimate, the security is overvalued, and so the security is undervalued…

There are three major categories of equity valuation models: present value models, multiplier models, and asset-based valuation models. Present Value Models/Discounted Cash Flow Models These models estimate intrinsic value based on expected future benefits, usually based on expected dividends (dividend…

Present value models are based on a fundamental tenet of economics stating that individuals defer consumption to reap future benefits. Therefore, the value of an investment today should be worth the present value of expected future benefits, defined as dividends…

The intrinsic value of a non-callable, non-convertible preferred stock can be calculated in much the same way as a share of common stock, except the expected sales price is replaced by the par value of the preferred shares. $$ V_0=\sum_{t=1}^n\frac{D_t}{(1+r)^t}+\frac{F}{(1+r)^n}$$…

Gordon (Constant) Growth Dividend Discount Model As the name implies, the Gordon (constant) growth dividend discount model assumes dividends grow indefinitely at a constant rate. $$ V_0=\frac{D_1}{r-g} $$ Where: \(D_1\) = expected dividends in year 1  Note that this is…

The Gordon (constant) growth dividend discount model is particularly useful for valuing the equity of dividend-paying companies that are insensitive to the business cycle and in a mature growth phase. On the other hand, multistage models are often used to…

The use of price multipliers to earnings, book value, and sales have all shown to have significant predictive value in determining relative future returns, implying that price multiples can be an effective tool for the valuation of companies. In addition,…

The concept of price multiples refers to ratios that compare a company’s share price with a financial metric, allowing for an assessment of the stock’s relative value. These ratios are commonly used by practitioners for screening purposes, identifying stocks for…