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Bruce Greenwalds Earnings Power Value EPV Lecture
Slides
Comments (9) (http://www.oldschoolvalue.com/blog/valuation-methods/bruce-greenwalds-earnings-power-value-epv-lecture-
slides/#comments)
Table of Contents
Stock Valuation Methods
Disadvantages of Stock Valuation Methods
The GreenWald EPV Method
About Jae Jun
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Stock Valuation Methods
Buffett and other respected investors mention that if you need a spreadsheet to determine a fair value of a
company, the investment idea should be thrown into the pass pile. I only agree to some degree on this
comment. Its true that we should concentrating on no brainer investments rather than deworsifying into extra
positions just for the sake of being invested, and while most people can read the financial statements to
some degree, Im sure many have trouble grasping all the numbers and coming up with a single dollar value
as a fair intrinsic value number.
Enter your Search Term...
For me, as I run through companies, I always look at the free cash flow and cash flow statement first to
determine whether the business is worth investigating. I cant immediately come up with a number but I can
determine whether the business is a good one. The stock valuation spreadsheets
(http://www.oldschoolvalue.com/stock-valuation-spreadsheet.php) you find on this site was created to
determine whether these stock ideas are cheap and to determine the buy and sell price range.
So far I use the following stock valuation methods:
Discounted Cash Flow (DCF) (http://www.oldschoolvalue.com/blog/valuation-methods/how-value-stocks-
dcf/)
Ben Graham Formula (http://www.oldschoolvalue.com/blog/valuation-methods/value-stocks-benjamin-
graham-formula/) using normalized earnings
Ben Graham Net Net Working Capital (http://www.oldschoolvalue.com/stock-screener/net-net-working-
capital-nnwc-stock-screen.php)
Multiple methods based on industry and competitors (used occasionally)
Disadvantages of Stock Valuation Methods
Discounted Cash Flow
Need to estimate a growth rate (http://www.oldschoolvalue.com/blog/valuation-methods/choosing-growth-
rates-and-discount-rates/). (Be conservative)
Need to project into the future
Does not work well for young, growth or cyclical businesses
Ben Graham Formula
Uses earnings which can always be inflated even if it is normalized
Projects using a EPS growth rate
Back tests have shown that the value is the upper range and overly optimistic
Ben Graham Net Net Formula
Calculates the value of assets only
Does not provide an upper range indicator
A snapshot valuation method
Multiples Valuation
Useless if business has no direct competitors (e.g. Mead Johnson Nutritionals. Im having quite a difficult
time trying to determine the fair value of the business.)
Earnings Power Value (EPV)
The GreenWald EPV Method
(http://cdn7.oldschoolvalue.com/blog/wp-
content/uploads/Greenwald-
EPV.jpg)
Valuation Method Greenwald EPV |
Photo: Stockopedia
So even with 4 analysis tools in my toolkit, there is a hole that needs to be filled. Currently, I am still unable to
value companies that are:
young (<5 year old)
cyclical
no competitors
growth
This is where I believe Bruce Greenwalds EPV (or the Greenwwald EPV) method will come in handy. The
stock valuation method allows the investor to value all of the above points.
A full detailed explanation of earnings power valuation (http://www.oldschoolvalue.com/blog/stock-
analysis/earnings-power-value-epv-valuation-microsoft/) in a practical step by step guide is available for
Microsoft. The stock investment spreadsheet (http://www.oldschoolvalue.com/stock-valuation-
spreadsheet.php) also allows you to perform a fully automated earnings power value stock analysis.
I was able to find Greenwalds lecture notes from Columbia business school on the investment process and
valuation which Im sure you will all benefit from.
The EPV section starts from slide 16.
Greenwald EPV (Earnings Power Value) lecture slides (http://www.scribd.com/doc/15987706/Greenwald-Earnings-
Power-Value-EPV-lecture-slides)
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9 Comments Old School Value Login
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Reply
ANON 5 years ago
A = Amortization

1
Reply
Jae Jun 5 years ago ANON
Thanks for answering Anon.


Reply
Shamapant 2 years ago
Jae,
As to your worries about EPVs use of earnings vs FCF, I think EPV attempts to use Owners earnings in a
way. Given, I just read the book and it's a bit of a blur, but he adjusts normalized earnings for special charges
to get a normalized EBIT and then adjusts for taxes,etc and SUBTRACTS CAPEX. The adjustment of D and
A and CAPEX to match up to each other is what, in my opinion, makes this viable because it indicates that
the normalized earnings ARE dropping to the bottom line....that's at least what I understood of it, still have to
go back through it again


Mike 4 years ago
Is there a detailed discussion somewhere here on how to search for stocks and what to look for? That is,
more on the chapter "how to fish where the fish is".
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6 comments a month ago
Old School Value I see you're a fellow mariners
fan living in pain... I feel you exactly.And yes that is

5 Interesting Economic Stats and Charts

2 comments 17 days ago
Old School Value thanks for the thoughts Ken.
ALSO ON OLD SCHOOL VALUE
Reply
Thanks
Mike


Reply
The Curious Investor 5 years ago
Not to split hairs, but I believe that Bruce Greenwald (in his book Value Investing: From Graham to Buffett
and Beyond) actually describes his analysis as completely discounting any growth. That is, as a value
investor, he's unwilling to pay any premium for growth. EPV valuation simply assumes standardized
earnings - "average" margins over "sustainable earnings" - multiplied by 1/WACC determines the
Company's current value. You'll notice it's very similar to a standard DCF analysis if you remove the growth
rate and assume WACC as the discount rate. Just substitute "sustainable earnings" for "sustainable cash
flow."
.-= The Curious Investor&#180s last blog ..Cash Conversion Cycle Case Studies =-.


Reply
Jae Jun 5 years ago The Curious Investor
Yep. I just finished going over the book a second time but there are some substantial differences.
Greenwald doesn't like to use DCF because of the assumptions and projections required.
However, I ultimately see the intrinsic value of the business going up when the company is able to
generate FCF. A company could have the highest sustainable earnings but could result in nothing if it
never drops to the bottom line.
This is the biggest problem I have with using the EPV. Enron had high sustainable earnings but had
people looked to see whether that number turned into FCF, it would have been a completely different
story.
I'm still thinking hard about how I will implement this.


Reply
Carl 5 years ago
I have a question on one of the equation on slide #7, Maint. Inv = Depr + A, What is A ?


Reply
Ryan 5 years ago
Hi Jae,
I just found your website from other sties. This looks great. Very useful info and resources.
By the way can you explain in details the difference b/w $15.95 spreadsheets and $21.95 spreadsheets?
What financial statements are included?
Thanks
Ryan


Reply
Jae Jun 5 years ago Ryan
Ryan, is the email address you entered correct? ryan2041 (at) mail.com ?? The email is bouncing.


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Carl I don't understand the 3rd graph. What's the
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How I Lost $3k on My First Investment and
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Old School Value Thanks Eric. Always a pleasure
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