Ben Graham Formula Upside

The Graham formula proposes to calculate a company’s intrinsic value V as:

V* = EPS x (8.5 + 2g) x (4.4 / Y)

V= the value expected from the growth formulas over the next 7 to 10 years EPS= the company’s last 12-month earnings per share
8.5= P/E base for a no-growth company
g= reasonably expected 7 to 10 year growth rate
4.4= the average yield of AAA Corporate bonds in 1962 (Graham did not specify the duration of the bonds, though it has been asserted that he used 20 year AAA bonds)
Y= the current yield on AAA corporate bonds.

For Graham, price-to-earnings (P/EPS) ratio should be no more than 15 and price-to-book value (P/BVPS) ratio should never exceed 1.5.

The drawback of the Benjamin Graham formula is that growth is a big element of any overall valuation.

At TEAM we determine the P/E for the company depending on our forecast earnings expectations, and observe the valuation relative to the company’s own share price history, the sector in which it operates (competitors) and the broader market.

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