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Fair Value

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29 replies to this topic

Sonu Panjwani


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    Fair Values for All Scripts ?

    Try to find out from Different Brokerage Houses....

    Muhammed Jawed


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    Asalamo Alaikum,

    Can anybody teach us how to calculate Fair Value ? Nowadays every brokerage house is giving different fair value due to different approach... What are these different approches???
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    View PostMuhammed Jawed, on Mar 23 2006, 01:16 PM, said:

    Asalamo Alaikum,

    Can anybody teach us how to calculate Fair Value ? Nowadays every brokerage house is giving different fair value due to different approach... What are these different approches???

    Very difficult. PAryaal and Samina from KSEFUNGROUP know how to do it. in fact one of them posted the calculation somewhere but havent been able to find it. am just posting what i found in another forum.

    Calculating the fair value of a stock is easy. The problem is what set of numbers do you use?

    To come up with (near-term) fair value you simply multiply the estimated annual earnings of a company (E)by the P/E of its industry. P/E x E = P (future price).

    But whose EPS estimate do you use? The number varies from analyst to analyst. Even the consensus number varies a bit, depending on the source.

    An even greater problem is where do you get the industry P/E? Again, that varies according to the source.

    For example, what is the fair value of Radvision (RVSN)? Its current price is 20.05. Using Yahoo!Finance as the source the annual EPS estimate for RVSN is 0.81. The industry P/E is 40.3. So the fair value is 0.81(40.3) or 32.64.

    The problem is that Yahoo!Finance places RVSN in the Processing Systems and Products industry. IBD does not have such an industry group. They place RVSN in the Computer-Networking group. If we go back to Yahoo!Finance we find that the P/E of the Computer-Networking group is 24.7. Now if we multiply the annual EPS estimate for RVSN (0.81) by 24.7 we come up with a fair value of 20.00. Quite a difference, and in this case very close to the current price of the stock.

    To help avoid comparing apples and oranges here we would need IBD to calculate industry P/Es, which to my knowledge they do not do. But even if they did, there are many companies that do not neatly fit into industry groups. A company like CSCO is easy to place. Both IBD and Yahoo!Finance put it in the Computer-Networking group, and that makes sense. What is really needed, and will not happen, is to standardize industry groupings.



    Eddie - glad to see you see the "topic" in a central location and your response. Yes, it would be a big help if IBD would at least give us an industry average for the groups (non-standard with S&P or anyone else).

    One problem occurs when analyst estimates aren't available (use plan B) and in that case we still need the industry pe average. (O'Neill has another way to calculate fair value and probably the reason they don't want to provide information on industry pes to calculate like most of Wall Street does).

    If we Company L has a pe of 12 and at the price of 15 and industry pe is 24, then we can estimate the near term fair value by comparing pes in a proportional manner.

    F.V. - 24/12 x $15 = $30. But we prefer to use analyst estimates if available first (Plan A). Then we can get near term and long term (i.g. 2006 and 2007 estimates).

    Best of Success
    Bruce (Poorman)


    asadabs wrote:

    I always wonder how do these analysts are able to calculate the fair value of the stocks. As i am in process of becoming financial analyst. i want to share a method to calculate the fair value of the stocks.
    for eg,
    a company AA give four percent dividend on its 10 rupee share i.e. 4 rupee per share. and the bank interest rate is 2.5%. Then the fair value of the stock can be computed as follows,

    fair value : 4 /2.5*100 = 160.

    I want all the expert people on this forum to share their views about the discussion may also share their methods to calculate the fair value of stocks.
    Asad Abbas

    well there u have missed some thing very important, tht is risk u r taking by investing in stocks plus 2.5% return ur taking is on bank deposits for short term, where as investor can still get 8% on national saving schemes.
    so for example if i can get 8% and risk premium of 5% investing in stocks then fair value of stock which is giving me 4/13*100= 30.77.
    Fair values will differ depending on risk premium.


    The calculation for fair value is relatively simple as long as you have access to the variables involved. The formula that is generally used for calculation the fair value of the futures contract is: CASH[1+R(X/365)]- DIVIDENDS-CASH. Rember that once calculated based on the previous days trading, the fair value remains constant until the market opens the following day. In contrast, the futures contract that fluctuates in price as it trades before the stock market opens. So if you see the futures contract trading up or down from the previous day's settlement, you have a fixed basis to compare it to (the fair value plus or minus the level at which futures are trading.) You have to compute a few things beforehand to plug into the equation.
    1. dividend calculation = (SPX x D) x (DTE/365)
    a. SPX is the closing value of the specific index
    b. D is the current dividend yield on the SPX
    c. DTE is the number of days until the contract expires.

    2. Besides the value for the dividend you must know:
    a. R is current interest rate measured by three month treasury bill or LIBOR.
    b. X represents time remaining until current futures contract expires.
    c. Cash is the closing value of the actual index, in this case the SPX.

    Just passing this along for anyone who might be interested in it. You can get a much better explanation by going to the site. Full of good stuff.


    I myself find this confusing. i will try to find something more simple.





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    Alam bhai .. Superb ...MasshAllah …. Thx for gathering all the helping stuff at one place....

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    Abdul Mateen Khan


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    Below is a definition of Fair Value that even i can calculate:)
    Now the problem is getting the Industry group PE. That is where i think the FV's of different brokerage houses are differing. Each of them could be using different Industry group PE. This here is subjective so little bit of difference is not that surprising. I have found different volumes of KSE 100 from different websites which is very perplexing. It should be same but in reality it is not. Problem could be if there is great disparity in the FV. If it is within a certain range then you have got a range to play in.





    A suggestion for you would be to look over the Poorman's Corner thread on this forum. Solid information that has helped me tremendously. One thing I've learned is to check fo Fair Values to make sure there is some upside potential to justify a stock going higher. I know IBD doesn't stress PE's, but if you had looked at the Industry Group PE on Reuter's and multiplied that number by the projected earnings, you would realize that this stock is well over fair value now. Using Reuter's numbers, I have a current year fair value of $54.32 (Ind Grp PE 21.3 X current year EPS $2.55)and next year fair value at $66.24 (Ind Grp PE 21.3 X next year EPS $3.11). Momentum might take the stock higher but compared to it's peers it is overvalued. You can get the Ind Grp PE data for free off of Reuters.com along with the future earnings data.

    Good luck
    Jerry C.

    Daba Khan

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    I have been feeling the Fair Value of Research Reports of different brokerage house give different Fair Value which is unfair.

    Here I will start this topic to guide Small investor how to Calculate fair value.
    If any of you know then share your knowledge.

    QUOTE(Daba Khan @ Apr 23 2006, 11:48 AM)

    NBP fair value 350 = AKD
    NBP fair value 200 = InvestCap

    Can anybody explain why and how to calculate FAIR VALUE?

    Today in Geo TV Tezimandee Host Fawad Called
    Mr. Abudallah Amin Research Head, AKD (Fair Value NBP Rs.292/-)
    Mr. Khalid Iqab Reseach Head, Invescap (Fair Value NBP Rs.210/-)

    To ask why there is a difference Fair Value of NBP i.e. Rs.82/-
    But they could not satisfy and finally they told the investor should read both
    reports and decide by himself/herself whose Fair Value is right.

    This is totally unfair, why investor decide by himself/herself if such a reputed
    Brokerage houses giving fair value, and why don't rely upon them.

    This is not a singel case, there are so many Research Houses quoting different
    fair values for different items.
    SECP should take notice and suitable action before innocent investors are trapped.

    Thank you Geo TV to respond on my request.

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