Intrinsic Value EPS or otherwise know as Benjamin Graham's formula.
This formula was invented by professor at Columbia University and value invstor Benjamin Graham - referred to as the "father of Value Investing".
Benjamin Graham presented this formula to value investors in his book: "The Intelligent Investor", that was re-published in 1973 edition.
In Benjamin Graham's words: "Our study of the various methods has led us to suggest a foreshortened and quite simple formula for the evaluation of growth stocks, which is intended to produce figures fairly close to those resulting from the more refined mathematical calculations."
The formula as described by Graham originally in the 1962 edition of "Security Analysis", and then again in the 1973 edition of "The Intelligent Investor" :
IV = EPS x (8.5 + 2g)
IV = Intrinsic Value
= trailing twelve months earnings per share
= P/E base for a no-growth company
= reasonably expected 7 to 10 year growth rate.
Revised formula:
Graham later revised his formula based on the belief that the greatest contributing factor to stock values (and prices) over the past decade had been interest rates.
In 1974, he restated it as follows:
The Graham formula proposes to calculate a company’s intrinsic value as:
= the value expected from the growth formulas over the next 7 to 10 years
= the company’s last 12-month earnings per share
= P/E base for a no-growth company
= reasonably expected 7 to 10 Year Growth Rate of EPS
= 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 as his benchmark for this variable)
= the current yield on AAA corporate bonds.
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