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Nighthawk Energy as valued by the Graham Formula Technique


Current Price
4.67p
Mkt Cap: £34.7m
Implied Valuation*
Subscribers Only


Benjamin Graham's Rule of Thumb was designed as a simple formula to emulate the more complex DCF method.

NB: It is not designed for companies with a below-par debt position.


Assumptions

hints ↓
The company's current normal earnings per share are: $.
Current Earnings

Graham did not give specific guidance as to the best figure to employ here. One option is to use normalised earnings for the current year, another possibility is to use the average earnings over, say, the last 3 years while another option to use forecast earnings (although this risks double-counting growth and relies on analysts who don't typically have the best record of forecasting conservatively). To smooth out volatility, we start off with an average of all three values, if available.

In the case of negative earnings, the growth formula is assumed not to imply, and the equity value is stated as zero.

Nighthawk Energy Hints

Latest Annual Earnings $-0.031
3 Yr Average Earnings $-0.023
12m Rolling Forecast Earnings $0.006

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The estimated medium-term (5-7 year) EPS growth rate is: %.
Medium Term Growth Rate

This assumption could be based either on analysts' forecast for longer-term growth or based on historical growth performance. Our approach is to calculate a linear "best fit" growth rate based on all available EPS data points, both forecast and historic (up to 10 years). We then average that with the analyst long-term forecast growth rate, if available. Recognising that analysts tend to be optimistically biased, for prudence, we cap the growth rate at 20% as its extremely rare for companies to exceed this rate compounded over the long term. This is by no means ideal in all cases and you may want to use one of the growth rates listed below, or some other approach.

Nighthawk Energy Hints
5 yr Avg Earnings Growth %
3 yr Avg Earnings Growth %
Last Year Earnings Growth %
1 yr Forecast Earnings Growth 1,297%
Long Term Broker Forecast Growth %

N.B. The implied medium-term growth rate of Nighthawk Energy based on the current share price under the Graham Formula is %.

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The growth multiplier is: x.
Growth Multiplier

Graham used a growth multiplier of 2x. However, as has been noted elsewhere, this can produce extremely high valuations for certain growth stocks, perhaps because certain stocks (such as tech stocks) exhibit much higher growth rates on average than those which Graham, as a value investor, was focused on. To be prudent and to add an additional margin of safety, we start things off with a growth multiplier of 1.5x.

hints ↓
The yield on 20 year AAA corporate bonds is: %.
Corporate Bond Rate

Graham added this to make stock valuations vary inversely with representative current interest rates. The best rate is probably the US AAA 20 year corporate bond yield which is available here




Description

Benjamin Graham was known for his thorough financial analysis of companies and is know as the 'father of security analysis'. While he was a master of complex valuation techniques, he realised that multi-stage valuation models could often be simplified. His original valuation rule of thumb was V = EPS * (8.5 + 2g) where V is the intrinsic value, EPS is the trailing 12 month EPS, 8.5 is the PE ratio of a no-growth stock and g being the growth rate for the next 7-10 years. This spreadsheet compares the results of this formula with a more involved two-stage DCF valuation.

The original formulation was made at a time when there was very little inflation, and growth could be assumed to be real growth. The AAA corporate bond interest rate prevailing at the time was 4.4%. The formula was later revised to incorporate the impact of different interest rate environments as:

In this case, Y is the current yield on 20 year AAA corporate bonds.

One important caveat to the use of Graham's formula is that he noted that it should not be used for companies with a below-par debt position. He wrote - "my advice to analysts would be to limit your appraisals to enterprises of investment quality, excluding from that category such as do not meet specific criteria of financial strength".

You can read more on Graham's Formula here.



* Disclaimer: These valuation tools are provided solely for informational & educational purposes so that users can easily run their own valuations. The pre-defined values are simply a starting point based on global assumptions that we have applied across the entire market – users should amend them as they see fit and not regard them as a substitute for their own judgment. Any resulting valuation outputs are necessarily generic and are not endorsed for a given stock by Stockopedia.