6/05/2011

Intrinsic Value Discounts

Calculating intrinsic value is simple…but only in theory.  It’s the technique that calculates the actual business value. The catch is the uncertainty and unpredictable nature of the inputs that make the results at times far from perfect. But understanding the inputs and what is impacting those inputs at least can provide additional confidence in your investment thesis to stay the course when Mr Market is telling you to run. The additional insight may be telling you to buy more when the market fear is driving the price lower. Hopefully building and improving our skills to estimate intrinsic value will also help us improve our investment results.
The definition of intrinsic value is simple; its the present value of all future cash flows. It gets far less exact and simple when you have to estimate the discount rate, growth rate and time frame for those future cash flows coupled with a terminal value but any small miscalculation can generate horrible results and a useless value conclusion.

For tonight’s post there is no need or benefit to struggle over trying to develop a more precise calculation of owner’s earnings, discount rates or the irregular flow of owner’s earnings. But in the future post it would be helpful to dig deeper into the impact and definition of these deceptively basic few inputs for our intrinsic value calculation. But just because we spend more time is developing a more involved method to forecast these inputs does not mean a more accurate or trust worthy conclusion.

Try keeping the inputs simple and conservative in your model. These ideas below are only a few that I believe are trading below their intrinsic value. Some are at a discount because the terminal value is large but the cash flow stream until that terminal value is realized are weak, others can have a stable steady cash flow stream or a fast growing cash flow. You get the idea but the topic can get interesting and give us an edge if we find an input that has tremendous but overlooked value but the market is unwilling to wait or misunderstood.

Now for a few ideas;
I will provide some quanitative support tonight. But i wanted to post something now because i believed there was value in the information below;

oops main computer crashed with models so i jumped on the lap top now 11:53 pm to let readers know i will have to wait to resolve; hopefully tomorrow night i can dig into specifics for the ideas below.


FLXS: Flexsteel Industries

Price = 15.11

PRLS: Peerless Systems Corp

Price = 3.25

PRLS was first introduced in the following two posts:

Cash Bargains
and
Informativeness of Insider Transactions


KEQU: Kewaunee Scientific Corporation

Price = 10.42

first introduced in the post

JBSS: John B. Sanfilippo & Son, Inc

Price = 9.06

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