How to Calculate the Intrinsic Value of a Stock like Benjamin Graham! (Step by Step)

Having the ability to

calculate

the

intrinsic

value

of a

stock

has been the key to success for many of the world's leading investors, such as Warren Buffett. In one of the best investment books of all time, intelligent investor Benjamin Graham laid out a formula he used to

calculate

the

intrinsic

value

of a

stock

in today's video. I am going to explain to you

step

by

step

how to calculate the intrinsic value of a stock using Graham's formula. Okay, now we're ready to start building. Our model uses Graham's formula, which will take us to the intrinsic value of the stock and you can see here on the side.

I've listed what each of these metrics represents and as I build this model, I'm going to write about talking about what each of these things means, so the first thing I'm going to do is create an area just to give you a title my model and let me know what model I'm using and I'm just going to title this Graham valuation since we're using his model to build this valuation and the first thing we need to know obviously is what stocks we're going to analyze, so for this example let's continue go ahead and say Let's look at the apple to find the intrinsic value of the apple using the gram formula and as you can see here, the first thing we need to do is know the earnings per share of the company, so let's make an area. for earnings per share, the next thing is this 8.5 right here, which if we come here we can see that this is the price to earnings basis for a company that has no growth, so I'm going to list it here and we're just going to say price to earnings without growth and we know this is going to be 8.5 according to Graham's formula and when we get here we can see 2g so this g is going to represent the typical growth rate over the next five years so I'm going to list two things here, I'm just going to write down the growth rate and then I'll list below this for g and I'll come back to this 2g and talk a little bit about this later. then we can see here that there's a 4.4 here and we can see that this is the average yield of aaa corporate bonds and this was the average yield during Graham's time, but it's also applicable today, so let's go ahead and let's list this here to see if I can spell it correctly and then the last thing in this formula is we need to know what y means, so y represents the current yield on aaa corporate bonds and that will be something that we will have to look up as we changes. constantly and now we have all the metrics we need to start completing our valuation, so the first piece of information we are going to need about Apple to arrive at this valuation is that we need to know its earnings per share.

So there are a couple of different ways we can find the earnings per share. The first way we could do it is if we just go to Google, we can go to Yahoo Finance and we'll show it here and if we go up here to Top we can just search for Apple and we'll open Apple and now we have a page that has some data about Apple. We want to find its earnings per share for the trailing 12 months and if we look here, here, it's here. So we can see that it's 5.11, so if we go back here, you can put 5.11 right here, but another quick way to do this in Google Sheets is to use the Google Finance function and if we do Google Finance and select Apple and just type in earnings per action, we can see that this will complete automatically, so let's say I were to change the actions right here and put verizon.

Verizon earnings per share will be filled in automatically, so it's up to you how you do that part, but That's a great way to automatically get the earnings per share and automate the whole valuation process so we can see here. Next we want our price to earnings for a non-growth company and Benjamin Graham went ahead and did it. I work hard and I found that this number is 8.5, so if you are going to use this formula, that is a number that will remain constant, so we can put 8.5 here and the next thing I need to do is fix the way I wrote this. and okay now we need to know our growth rate so we went ahead and made the growth rate 2g so this g stands for growth rate so we'll go back to Yahoo Finance and the growth rate is not listed in this page. here, but if we come here to analyze and we click on this, we can scroll down here and we can see over the next five years or so, we can see the growth rate and we can see that analysts predict that Apple will have a growth rate of approximately 17.93. percent and this is a number that depends on yourself, so if you feel that it is too high or too low, this is an adjustable number because it is a prediction about the future for the sake of this model, I am going to move on. and follow what the Yahoo financial analyst thinks will be 17.93, this 2g is just the multiplier of this growth rate, so it will simply be 2. and then we need to know the average yield of a bond aaa that because this formula It's at 4.4, which is kind of an all-time average, but the last thing we need to know is what y represents for the current yield on aaa corporate bonds, so we need to go back and look at the current yield on a bond. corporate AAA, so I'm going to type this into Google and we can see here.

I'm going to open it up and we want to make sure that we have the most up-to-date data on this. So let's go here and we can see that this is the official economic data and we want to know the yield on corporate bonds and if we look now we can see that it is currently 2.57 and this is something that changes quite frequently, so it is important go back and look at this data once you update your model, so we'll put 2.57 here and now we have all the data we need to calculate Apple's intrinsic value, but before we do that we want to make sure this is a reusable model, so I want to go ahead and highlight everything in this model that can change in the future, for example, earnings per share will change in the future, so let's go ahead and highlight this and we'll know. that this 8.5 will not change because it is consistent with the formula, this growth rate will definitely change in the future, so we want to highlight this as well. r2 here will not change because that is our multiplier for the growth rate, our 4.4 will not change. because that is consistent with the formula, but why our current triple a corporate bond yield will definitely change in the future, so we want to highlight this as well and now we want to go down here and we really want to start calculating the intrinsic value of this stock, so we're going to use this data that we've already collected and we're going to plug it into Graham's formula, so we're going to start with the equal sign and we're going to open up this parenthesis and the first thing we need is our earnings per share and we want to take this and we want to multiply it and have another open parenthesis and we're going to take our 8.5 here and add it to these two numbers here multiplied together, so we're going to take our 17.93 and multiply this. by 2 and then we're going to close two parentheses here and then we want to multiply all of this and we want to multiply it by our 4.4 and let's close this parentheses and then the final step is to divide all of this by our current corporate bond yield aaa our value and so we're going to divide it and we're going to divide it by 2.57 and when we press enter we can see that we currently have our Apple intrinsic value based on our formula and our model that we put in. and now we have our intrinsic value calculated, but we actually want to take this one step further, so we want to know what our margin of safety is so we can make a decision whether we should buy or sell this stock, so let's move on. and we frame this area by itself and we will scroll down and quickly create a new area and here we want to know what is the current price of the stock, we want to know the difference and we need a margin of safety and then we need to know what are the prices of acceptable purchases and we'll go ahead and center this text as well, so for the current price this is something we could Google again, but I'll go ahead and use the Google Financial Formula again to do this and make it refer back to Apple and this gives us the current price of Apple stock, so what I need to do now is know the difference between the current price and the intrinsic value so all I'm going to do is take the current price and divide it by the intrinsic value and here we can see that we want to convert this into a percentage so that the difference in these prices is 37.58 percent, so the current price is only 37.58 of the intrinsic value of this stock and let's say our margin of safety is of about 65, so based on this, we want to know what the acceptable prices are, so we want to take our 65 percent and we want to multiply it by the intrinsic value. of this stock and we can see, based on this data, that our acceptable purchase price will be 252 or any value less than that and the last thing I want to do with this model is add an area that tells me to buy or sell, so I want to automate this sheet calculation to automatically tell me if I should buy or sell this stock based on the variables we enter here, so to do this we will use an if statement and we want to say if our acceptable purchase price is less than the intrinsic value then we want say buy and if we don't want it to say sell and we press enter here we can see that it says buy the stock right now, let's go ahead and format this to make it look better and it excludes it, so now we have a model based on Graham's formula that calculates the intrinsic value of the apple and also gives us a signal on whether we should buy or sell apples based on our margin of safety and One of the things you will notice about this model is that our intrinsic value is currently much higher than the price current Apple, so this leads me to want to talk about one of the drawbacks of this formula, which is why many investors today believe that the growth part of the formula, which is 8.5 plus 2 g, is too aggressive and a more realistic price/earnings basis for a non-growth company, instead of 8.5, it should be 7 and instead of 2g, for a growth multiplier, it should be 1g, so What they've done is create a revised formula with the changes that I just mentioned, so what I'm going to do is take that revised formula and build a model identical to the one we just made and we'll compare the two together, okay, so I jumped forward and we can see here on the right.

I've created a model based on Graham's revised evaluation formula, so here on the left we have the old formula that we just used and the only changes I've made on this side are formatting changes so that all the numbers remain the same. themselves. We can see that we still have our same intrinsic value and here on the right we can see really the only one. changes with this revised valuation formula instead of the price to earnings of a non-growth company being 8.5, it is now 7. and instead of a 2g multiplier here, we now have a 1g multiplier and when we cast A look at the intrinsic value of Between the two there is a big difference, so in our original formula we can see that the intrinsic value was $388 per share, but in the revised formula that is more used today we can see that our intrinsic value is $218 per share, so we can Let's see how much difference this little revision can really make and when we get to our margin of safety area we can see that we maintained the same margin of safety of 65 percent and when we take a look at our acceptable purchase price for our The revised formula is $141 per share, which is actually less than the current price, so based on our margin of safety, this is not a time when we would want to buy Apple stock and when we compare it to the original valuation we can see that It will be a time when we will want to buy shares so you can see how big a difference the two formulas can make, so let's go ahead and do one more example and what I've done is to automate both models to where all we have to do is update the data that is in the yellow squares and our model will update automatically so let's say we want to take a look at Verizon so the first thing we need to do is list here Verizon stock ticker. and the Verizon stock ticker here and we can see that our earnings per share has already been automatically populated.

The next thing we need to do is find Verizon's projected growth rate, so let's go back to Google and then back to Google. financials and we need to find the growth rate so we'll put your ticker here and we'll look for communications from Verizon and we'll come here to analyze and if we scroll to the bottom we can see that their projected growth rate will be 3.17 percent so let's go back to our model and we'll put in 3.17 for the growth rate and we can see here our current performance intriple a corporate bonds. We just looked for it before, so we know it's been like this.

It hasn't changed and I don't want to change my safety margin at this time. I think I want to keep it the same so we can see, based on the data we just entered, that we already have our intrinsic value calculated in both models. We can see with Graham's original valuation formula that the intrinsic value is $122 per share and with the revised valuation formula we get an intrinsic value of $84 per share and when we take a look at our margin of safety it is more or less the same as Apple stock based on the original valuation, this would be a time when we want to buy the stock and based on our new valuation which is the revised formula, we can see this.

It is not a time when we would want to buy stock . Keep in mind that no valuation model is perfect and what we really want to achieve when creating financial models is a range in which we believe the intrinsic value of the stock always falls. your due diligence when making an investment decision and please note that I am not a financial advisor. I hope this video helped show you how to calculate the intrinsic value of a stock using Benjamin Graham's formula if you want to be able to do so. download this template I created in Google Sheets and then you can head over to my Patreon page at the link in the description.

That being said, thank you all so much for watching and don't forget to like and subscribe to the channel.