How to determine fair market value of a stock?

April 7, 2006 8:58 AM

Seeking calculation or calculator for easier determination of legitimate share price for companies.

Any one have any ideas or know of even a web based calculator so I can better determine a fair market value of a share? In other words, if a share is over valued or under valued based upon some standard input types.

I recognize there are inherent difficulties in such a simplified system - but I am fairly sure there are ways to determine with some confidence factor given a balance sheet. I am not looking for a sure thing, just a starting point.

posted by fox_terrier_guy to work & money (7 answers total)

I think you need to be disabused of your notions about valuation, but since that wasn't the question you asked and there are hundrends upon hundreds of books available on the subject, I'll restrain myself.

I don't know about any calculators, but I'm not sure why you'd need one. Do you already know which balance sheet items or other metrics you'd like to test and what benchmarks you're aiming for? If it's just a matter of figuring out how to do certain calculations, I could probably answer those questions. Most could be made into simple Excel models.

Also, while again this isn't a direct answer to your question, MSN Money, among others, have stock screens that allow you to find companies that meet certain criteria (P/E multiples, profit margins, growth rates, etc).
posted by mullacc at 9:21 AM on April 7, 2006

Billions have been poured into this question. Literally. Thousands of people everyday are spending their entire working day on these questions. If you can get it off of a balance sheet I'd patent that process immediately.
posted by Ironmouth at 9:24 AM on April 7, 2006

At best, you could look at a liquidation value for your shares. The liquidation value is the difference between corporate assets and liabilities, divided by the number of shares. If the liquidation value is greater than the share price then any number of investment banks will happily lend you all the money you need to buy all of the shares and liquidate the company. It is very unlikely that you will find a company with such an upside-down liquidation value. If you do, it is unlikely that existing shareholders will be willing to sell.

Beyond liquidation value, you get into speculative territory. Does the company have any strategic value to you? Does it have resources that you or the company executives are uniquely able to develop? Does it have monopoly like access to any markets? Large customer contracts? Unique vendor relationships?

The only other simple rule of thumb is as follows:
1. If you just sold your shares, you will quickly realize that they were undervalued (you should have received more money for them!)
2. If you just bought shares, you will quickly realize that they were overvalued (you paid too much!)
posted by b1tr0t at 10:29 AM on April 7, 2006

The only way to determine fair market value of a stock is to ask the market what it will give you for it. However, this looks like a good introduction to the principles investors use to value a company based on its financial reports. One guy I know of likes to calculate several measures of value (at least six IIRC), throw out the highest and the lowest, and take the mean of the remaining ones.
posted by kindall at 11:30 AM on April 7, 2006

My business planning professor has repeatedly emphasized the point that there is no "correct" value for any company. He would, however, approve of kindall's friend's method of determining several values based upon different methods and taking a mean of a few in the middle.
posted by MrZero at 3:36 PM on April 7, 2006

Even relatively simple, traditional metrics like P/E ratio have become hugely skewed and strange.

Examples: PCLN and on the other end of the spectrum GOOG.
posted by I Love Tacos at 3:40 PM on April 7, 2006

To further emphasize kindall's point, take a look at the proxy statement on the Procter & Gamble / Gilette merger. The section called "Opinions of the Financial Advisors" includes three "fairness opinions" given by the advising investment banks, Goldman Sachs, UBS and Merrill Lynch. These analyses should be taken with a grain of salt* and their purpose is not the same as yours, but it provides a good example of various valuation methodologies used and that it is more of an art than a science.


*Fairness opinions should be viewed sceptically, of course. Merrill Lynch, for example, was paid $1.5 million for their fairness opinion (and $30 million more for their advisory work). But, the delivery of the opinion will protect the directors of PG from lawsuits, so it is taken very seriously.
posted by mullacc at 5:17 PM on April 7, 2006