Our Methodology
We use multiple valuation models to estimate a stock's intrinsic value, then combine them into a consensus estimate. Here's exactly how each model works, with full transparency on inputs and limitations.
1. Discounted Cash Flow (DCF)
The gold standard of intrinsic valuation. Projects future free cash flows and discounts them back to present value.
Intrinsic Value = Σ (FCF × (1 + g)^n / (1 + r)^n) + Terminal Value
Inputs:
- Free Cash Flow (FCF): Latest annual FCF from cash flow statement
- Growth Rate: Based on trailing earnings growth, capped at 20%, floored at 2%
- Discount Rate: CAPM-derived (Risk-free rate + Beta × Market risk premium of 6%)
- Terminal Growth: 2.5% (long-term GDP growth assumption)
- Projection Period: 10 years
Limitations:
Highly sensitive to growth rate and discount rate assumptions. Works best for companies with stable, positive free cash flow. Less reliable for early-stage or cyclical companies.
2. Graham Number
Benjamin Graham's simplified formula from "The Intelligent Investor." A conservative estimate suitable for stable, established companies.
Intrinsic Value = √(22.5 × EPS × Book Value Per Share)
Inputs:
- EPS: Trailing twelve months earnings per share
- Book Value: Book value per share from balance sheet
- 22.5: Graham's constant (assumes max P/E of 15 and max P/B of 1.5)
Limitations:
Only works when both EPS and book value are positive. Tends to undervalue growth companies with low book values (like tech). Very conservative — good as a floor estimate.
3. Earnings Power Value (EPV)
Values the company based on current earnings with zero growth assumed. A conservative baseline — if the stock is cheap even without growth, that's a strong signal.
Intrinsic Value = EPS / Cost of Capital
Inputs:
- EPS: Trailing twelve months earnings per share
- Cost of Capital: CAPM-derived discount rate
Limitations:
Ignores growth entirely — will significantly undervalue high-growth companies. Best for mature businesses with stable earnings.
4. Relative Value (P/E Based)
Compares the stock's valuation to its sector peers using the sector median P/E ratio as a benchmark.
Fair Price = EPS × Sector Median P/E
Inputs:
- EPS: Trailing twelve months earnings per share
- Sector Median P/E: Median trailing P/E of all stocks in the same sector
Limitations:
Assumes the sector average is "correct." If the entire sector is overvalued, this model will overvalue individual stocks too. Best used as a sanity check alongside absolute valuation models.
5. Dividend Discount Model (DDM)
Values dividend-paying stocks based on the present value of future dividend payments. Only applicable for stocks that pay dividends.
Intrinsic Value = Annual Dividend / (Discount Rate - Dividend Growth Rate)
Inputs:
- Annual Dividend: Current annual dividend per share
- Discount Rate: CAPM-derived cost of equity
- Dividend Growth Rate: Estimated from earnings growth, capped at 10%
Limitations:
Only works for dividend-paying stocks. Not applicable to growth companies that reinvest all earnings. Sensitive to the dividend growth rate assumption.
Consensus Value
The consensus intrinsic value is the average of all applicable models after removing extreme outliers (values more than 3× or less than 0.33× the median are excluded).
If 4 out of 5 models agree a stock is undervalued, that signal is stronger than relying on any single model. The consensus approach reduces the impact of any single model's weaknesses.
Data Sources
- All financial data sourced from Yahoo Finance
- Risk-free rate: 10-Year US Treasury yield (updated daily)
- Prices updated daily after market close
- Intrinsic values recomputed quarterly after earnings reports
Disclaimer: These estimates are for informational purposes only and should not be considered financial advice. All models have limitations and the actual intrinsic value of any company is inherently uncertain. Always do your own research before making investment decisions.