There are two quick down and dirty ways to assess stocks on a fundamental basis: Cash Flow (Operating Company) & Tangible Book Value (Asset Based Company).
Today I am going to show you how I quickly value Operating and Asset based companies, step by step.
Let’s get started.
1. Determine what type of company you are evaluating
Generally an operating company generates a product. A good example of this is Coca-Cola (KO). Coca-Cola is a beverage company that owns or licenses and markets more than 500 nonalcoholic beverage brands, primarily sparkling beverages but also a variety of still beverages.
While an asset based company acquires assets and generates profits from those assets. Let’s take Bank of America (BAC). Bank of America is a financial institution, serving individual consumers, small businesses, corporations and Governments with a wide range of financial products and services.
For this example I am going to use Morningstar and will value both Coca Cola (KO) and Bank of America (BAC).
2. Gather the financial statements for that company
I typically use Morningstar, but you can use the following sites as well:
Enter the symbol your are looking for.
Click on “Financials”
For Operating Companies we need to look at “Cash Flow”
3a. Calculate Cash Flow Per share (For operating companies only!)
I calculate Cash Flow Per share by subtracting the previous years “Investments in Plant, Property, and Equipment” ($2,215m) from the current year’s Cash from Operating Activities ($9,474m).
This results in $7,259m in Cash Flow for Coca-Cola.
The next step I take in order to calculate Cash Flow PER SHARE, is divide the company’s Cash Flow ($7,259m) by the current number of outstanding shares (4,568m). This information can be found towards the bottom of the company’s income statement.
This results in $1.58 of Cash Flow per share.
Typically I only pay between 8 – 10 times Cash Flow per share, but for a Dividend King I am willing to pay up to 15 times Cash Flow per share.
Therefore in this particular example my “Buy up to Price” for Coca-Cola is 15 x $1.58 = $23.70
3b. Calculate Tangible Book Value (For asset based companies only!)
For Asset Based companies we need to look at the “Balance Sheet”
I calculate Tangible Book Value per share by subtracting “Goodwill” (69,967m) and “Total Liabilities” (1,898,945m) from Total Assets (2,129,046m).
2,129,046 – 69,967 – 1,898,945 = 160,134m Tangible Book Value
In order to calculate the Tangible Book Value per share you need to divide the Tangible Book Value by the number of shares outstanding.
To get the number of shares outstanding we need to look at the income statement.
160,134m / 10,457 = $15.31 Book Value Per Share
I only buy an asset based company when it is trading under 75% of Tangible Book value per share
Therefore in this case the “Buy up to Price” of Bank of America (BAC) is $11.48