The Model Price incorporates three factors, each of which contributes to the valuation of a stock:
- Intrinsic Business Value(IBV) is based on how efficiently a company's balance sheet can generate earnings.
- Earnings growth is calculated using past and expected earnings, as well as the implied return on equity. This measure is adjusted for the quality of the earnings estimate, which we determine by the dispersion and number of estimates.
- Balance sheet structure and efficiency is a factor that measures how sensitive the value of the underlying financial structure is to changes in its market value.
These factors explain the bulk of any stock’s market price, but the extent to which each factor is favoured by the market can change slightly over time. We run a regression analysis daily on these factors for the 2,000 companies in our database. This enables us to compare very different companies using a consistent, logical set of criteria that adapt to evolving market preferences.