The Buffett Approach to Valuing Stocks

Eaton Corporation (ETN) Example

The Buffet Approach to Valuing Stocks: Eaton Corporation (ETN) Example

Key: Input Data
Valuation Calculations
STEP 1: Set up spreadsheet with raw data

Book Value per Share (BV)

Earnings per Share (EPS)
Dividends per Share
Shares Out (Millions)
Price-Earnings Ratio (P/E) - high
Price-Earnings Ratio (P/E) - low
Revenue
Net Income
Shareholder Equity

1998
14.34
2.40
0.88
143.4

6625
349
2057

1999
17.73
2.98
0.88
148
12
7
8,402
439
2,624

2000
17.64
3.26
0.88
136.6
17
11
8,309
383
2,410

2001
17.81
1.65
0.88
139
34
23
7,299
233
2,475

2002
16.30
2.20
0.88
141.2
23
15
7,209
315
2,302

2003
20.37
2.67
0.92
153
21
13
8,061
402
3,117

2004
23.52
4.22
1.08
153.3
18
13
9,817
633
3,606

2005
25.44
5.38
1.24
148.50
14
11
11,115
28
3,778

2006
28.07
6.39
1.48
146.30
13
10
12,370
978
4,106

2007
35.42
6.90
1.72
146.00
16
11
13,033
1,017
5,172

2008
38.30
6.83
2.00
165.00
15
5
15,376
1,109
6,317

10-Year
10-Year
Average Cumulative
Growth
Growth
Median
10.32%
167.09%
11.03%
184.58%
16.80%
117.39%
1.41%
15.06%
16.5
11.0
8.78%
132.09%
12.25%
217.62%
11.87%
207.10%

2006
22.8%
23.8%
23.2%
76.8%

2007
19.5%
19.7%
24.9%
75.1%

2008
17.8%
17.5%
29.3%
70.7%

Median
17.8%
16.7%
29.3%
70.7%

STEP 2: Calculate book yield

Book Yield (per Share)

Book Yield (Return On Equity-ROE)
Payout Ratio
Retention Ratio

1998
16.7%
17.0%
36.7%
63.3%

1999
16.8%
16.7%
29.5%
70.5%

2000
18.5%
15.9%
27.0%
73.0%

2001
9.3%
9.4%
53.3%
46.7%

2002
13.5%
13.7%
40.0%
60.0%

2003
13.1%
12.9%
34.5%
65.5%

2004
17.9%
17.6%
25.6%
74.4%

2005
21.1%
0.7%
23.0%
77.0%

STEPS 3 & 4: Estimate future BV and EPS

Growth in Book Value (BV)
Return On Equity (ROE)
Percent Earnings Return
Payout Ratio

12.61%
17.83%
70.72%
29.28%

Book Value per Share (BV)

Earnings per Share (EPS)

2009 E 2010 E 2011 E 2012 E 2013 E 2014 E

43.13 48.57 54.69 61.59 69.36 78.11
7.69
8.66
9.75 10.98 12.37 13.93

2015 E
87.96
15.69

2016 E
99.05
17.66

2017 E
111.54
19.89

2018 E
125.60
22.40

STEP 5: Estimate future P/E ratio and stock price

Future P/E
Future Price per Share

Low
Avg. Median High
P/E
P/E
P/E
P/E
5.0
15.1
13.5
34.0
111.99 338.22 302.39 761.56

Graziadio Business Report, 2009, Volume 12, Issue 3

http://gbr.pepperdine.edu/092/investlikebuffet.html
By Steven R. Ferraro, PhD, CFA

Copyright 2009 Pepperdine University

The Buffett Approach to Valuing Stocks

Eaton Corporation (ETN) Example

STEP 6: Calculate expected return on investment

2009 E 2010 E 2011 E 2012 E 2013 E 2014 E
2.25
2.54
2.86
3.22
3.62
4.08

Common Dividends
Current Price per Share

Cash Flows
Low P/E Assumption Return
Average P/E Assumption Return
Median P/E Assumption Return
High P/E Assumption Return

2015 E
4.59

2016 E
5.17

2017 E
5.82

2018 E
6.56

65.00
Today's
Price 2008 E 2009 E 2010 E 2011 E 2012 E 2013 E
-65.00
2.25
2.54
2.86
3.22
3.62
4.08
-65.00
2.25
2.54
2.86
3.22
3.62
4.08
-65.00
2.25
2.54
2.86
3.22
3.62
4.08
-65.00
2.25
2.54
2.86
3.22
3.62
4.08

2014 E
4.59
4.59
4.59
4.59

2015 E
5.17
5.17
5.17
5.17

2016 E
5.82
5.82
5.82
5.82

2017 E
6.56
6.56
6.56
6.56

Expected
Price
111.99
338.22
302.39
761.56

Annual
Expected
Rate of
Return
9.4%
19.0%
17.9%
27.2%

Growth in Book Value

STEP 7: Interpret results

17.9%
7%
8%
9%
10%
11%
12%
13%
14%
15%

P/E Ratio 10 Years from Today

8
10
12
14
15
16
18
20
22
8.0%
9.9% 11.5% 12.8% 13.4%
14.0%
15.1%
16.1%
17.0%
9.0% 10.8% 12.4% 13.8% 14.4%
15.0%
16.1%
17.1%
18.0%
9.9% 11.8% 13.4% 14.8% 15.4%
16.0%
17.1%
18.1%
19.0%
10.8% 12.7% 14.3% 15.7% 16.4%
17.0%
18.1%
19.1%
20.0%
11.7% 13.7% 15.3% 16.7% 17.3%
18.0%
19.1%
20.1%
21.0%
12.7% 14.6% 16.2% 17.7% 18.3%
18.9%
20.1%
21.1%
22.0%
13.6% 15.6% 17.2% 18.6% 19.3%
19.9%
21.1%
22.1%
23.0%
14.5% 16.5% 18.2% 19.6% 20.3%
20.9%
22.0%
23.1%
24.0%
15.5% 17.4% 19.1% 20.6% 21.2%
21.9%
23.0%
24.1%
25.0%
0.0147 0.0323 0.0472 0.0602 0.0661 0.071626563 0.081939449 0.091316535 0.099921246

Graziadio Business Report, 2009, Volume 12, Issue 3

http://gbr.pepperdine.edu/092/investlikebuffet.html
By Steven R. Ferraro, PhD, CFA

Copyright 2009 Pepperdine University