What is a Lincoln Valuation?
A Lincoln Valuation is a theoretical share price value calculated by Lincoln’s Analyst team using forecast earnings figures and is designed to give an indication of the true value of a Star Stock in relation to its current share price.
The relationship between a company’s current share price and its true value can provide an indication of the underlying value of a company should they consistently meet (or exceed) forecast earnings figures.
How is a Lincoln Valuation calculated?
Each Lincoln Valuation is calculated by using a weighted combination of commonly used earnings forecast valuation methods (such as capitalisation of earnings, discounted cash flow and dividend discount models).
The specific weightings attributed to each valuation method vary dependent upon the industry in which the company operates. To account for extraordinary circumstances, specific weighting criteria and/or thresholds may be altered at the discretion of Lincoln’s Analyst team.
Interpreting the Lincoln Valuation
Each Lincoln Valuation is a point in time, theoretical valuation of a company’s share price based on forecast earnings figures. A company’s earnings are the strongest correlation factor to long term share price appreciation.
However, future earnings are not the only factor that can influence a company’s share price.
Therefore, the intention of a Lincoln Valuation is to indicate the underlying value of a share price should the company consistently meet (or exceed) their earnings forecasts and all other factors remain equal.
It is important to emphasise that a Lincoln Valuation is NOT a share price target to be relied upon as a buy or sell recommendation. It simply meets Golden Rule No. 4 of our Nine Golden Rules.
A Lincoln Valuation does not attempt to predict that the share price will reach a certain dollar value within a particular period of time, it is simply an indication of the underlying value of a stock based on forecast earnings figures.
The Lincoln Valuation display within the Stock Doctor system is shown on the summary screen with a classification of discount, fair value or premium is displayed.
Interpreting the Lincoln Valuation display
The Lincoln Valuation display appears under Golden Rule #4 on the Company Summary screen.
This display illustrates the relationship between Lincoln’s opinion of a Star Stock’s true value based on earnings forecasts and its current share price.
Note: The share price is expressed as a discount/premium to the Lincoln Valuation.
Here are some example scenarios to illustrate how to interpret the Lincoln Valuation display for companies in the Stock Doctor PC version. This classification system is also applied to Lincoln preferred income stocks and Lincoln covered stocks on the online Nine Golden Rules screen.
1. Share price at a discount
Share Price < Lincoln Valuation
For example, if a stock is currently trading at $20 per share and has a Lincoln Valuation of $25 per share, this suggests that based on earnings forecasts, when paying $20 per share you may actually be receiving $25 worth of value. Hence, this may be an attractive investment opportunity worthy of further investigation because the current share price is trading at a 20% discount to the Lincoln Valuation.
2. Share price at fair value
Share Price = Lincoln Valuation
Fair value covers share prices trading in the range of 5% under to 15% above the Lincoln Valuation. For example, if a company is currently trading at $25 per share and has a Lincoln Valuation of $25 per share, this suggests that based on earnings forecasts, when paying $25 per share, you may be receiving a fair value of $25. Hence, further investigation may be required to determine what factors beyond earnings forecasts may influence future share price appreciation.
We allow a greater scope within the premium range because of the very nature of our Star Stock selection process where we are often looking at fundamentally superior stocks who command some premium be put on them as they are better than peers.
3. Share price at a premium
Lincoln Valuation < Share Price
For example, if a company is currently trading at $30 per share and has a Lincoln Valuation of $25 per share, this suggests that based on earnings forecasts, when paying $30 per share, you may only be receiving $25 worth of value. Hence, this may not be an attractive investment opportunity in terms of potential for capital appreciation because the current share price is trading at a 20% premium to the Lincoln Valuation.
A company’s current share price may have already factored in a significant future event (such as merger/acquisition plans or the signing of a major contract) in anticipation of the event occurring. However, the event may not have been factored into the forward earnings estimates used to calculate the Lincoln Valuation. Investors should take this into consideration when assessing the underlying value in relation to share price.