Investing is an art. But it’s also a craft and a science at the same time. In this article, I’ll teach you everything you need to know about an Earnings Growth Model. This models tells you which return to expect from your investments.
A mathematical question: how do you get to the -1.7% contraction? I know it’s (new-old/old), but i don’t understand the 0.1.
Thanks you!
It's because we estimate that the valuation will normalize in 10 years. That's where the 0.1 comes from :)
With the Earnings Growth model, are you usually conservative with the multiples?
Absolutely.
Better to surprise on the upside :)
That was very easy to read and follow, Pieter! Well done! 🙂
I need to re-read this and run through the exercise in my journal to have the lesson glue itself to my brain. 🖋️
Always feeling blessed to see you here, Boris!
thanks for sharing this simple and valuable model
It's a true honor!
Thank you for continuing to write these in a simple, straightforward way.
It's a true honor, Gary!
Thanks for detailing the model. Always helpful to see how others value companies.
I appreciate you, Joel!
I would replace Dividend Yield with Total Shareholder Yield, which includes share buybacks and debt payments.
Buyback is included in the EPS Growth. That's why we just use the dividend yield.
Otherwise you would include the buyback yield twice. :)
How did you get that the fair P/E was 16x ?
Yeah I couldn’t figure how the P/E ratio in example was 16x either.
Think it’s just an assumption he was making as an illustration
What The Curious LP mentions is correct.
To determine a fair Exit PE, the Microsoft example provides more guidance
Ok i see it now! Sorry! You are dividing the multiple compression over the 10 years to smooth it out. Thank you for explaining.
Exactly!
So then if it’s 9 years it’s 0.09? Sorry for the questions?!
Than it would be 100/9 :)
When it would be 5 years, you multiply it by 0.2x
A mathematical question: how do you get to the -1.7% contraction? I know it’s (new-old/old), but i don’t understand the 0.1.
Thanks you!
It's because we estimate that the valuation will normalize in 10 years. That's where the 0.1 comes from :)
With the Earnings Growth model, are you usually conservative with the multiples?
Absolutely.
Better to surprise on the upside :)
That was very easy to read and follow, Pieter! Well done! 🙂
I need to re-read this and run through the exercise in my journal to have the lesson glue itself to my brain. 🖋️
Always feeling blessed to see you here, Boris!
thanks for sharing this simple and valuable model
It's a true honor!
Thank you for continuing to write these in a simple, straightforward way.
It's a true honor, Gary!
Thanks for detailing the model. Always helpful to see how others value companies.
I appreciate you, Joel!
I would replace Dividend Yield with Total Shareholder Yield, which includes share buybacks and debt payments.
Buyback is included in the EPS Growth. That's why we just use the dividend yield.
Otherwise you would include the buyback yield twice. :)
How did you get that the fair P/E was 16x ?
Yeah I couldn’t figure how the P/E ratio in example was 16x either.
Think it’s just an assumption he was making as an illustration
What The Curious LP mentions is correct.
To determine a fair Exit PE, the Microsoft example provides more guidance
Ok i see it now! Sorry! You are dividing the multiple compression over the 10 years to smooth it out. Thank you for explaining.
Exactly!
So then if it’s 9 years it’s 0.09? Sorry for the questions?!
Than it would be 100/9 :)
When it would be 5 years, you multiply it by 0.2x