The original Graham formula for valuing stocks was:
V* = EPS x (8.5 + 2g) * (4.4/Y)
V* = Intrinsic value of the stock
EPS = Trailing twelve-month earnings per share of the company
8.5 = PE of a stock at 0% growth rate
g = Growth rate of the company for the next 7-10 years
4.4 = Average 10 years corporate bond yield (1962)
Y = Current 10 years corporate bond yield
Note: Conservative Graham Formula
Many conservative investors have even modified the Graham formula further to reach a defensive intrinsic value of the stocks.
For example, Graham originally used 8.5 as the PE of the company with zero growth. However, many investors use this zero growth PE between 7 to 9, depending on the industry they are investigating and their own approach.
Further, Graham used a growth multiple of ‘2’ in his original equation. However, many investors argue that during Graham’s time, there were not many companies with a high growth rate, such as technology stocks which may grow at 15-25% per annum. Here, if you multiply this growth rate with a factor of ‘2’, the calculated intrinsic value can be quite aggressive. And hence, many investors use a multiple factor of 1 or 1.5 for the growth rate in their calculations.
Overall, the revised formula of conservative investors turns out to be:
V* = EPS x (7 + 1.5g) * (4.4/Y)
P.S. You can customize this formula using our above calculator for performing your preferred calculations.