Lessons
- Equity Analysis Part 2 - Introduction
- Porter’s Five Competitive Forces
- Industry Analysis
- Supply and Demand Analysis
- Financial Projections in Emerging Markets
- Cost of Capital in Emerging Markets
- Cash Flows: Dividends vs. Free Cash Flows vs. Residual Income
- Dividend Discount Model (DDM)
- Gordon Growth Model (GGM)
- Present Value of Growth Opportunities (PVGO)
- GGM, Leading P/E Ratio, and Trailing P/E Ratio
- Multi-Stage Dividend Discount Models
- H-Model for Valuing Growth
- Sustainable Growth Rate
Present Value of Growth Opportunities (PVGO)
- A stock's valuation can be heavily influenced by future growth expectations.
- As a company generates positive earnings and retains these earnings, its book value of equity increases; however, in order for the positive retained earnings to create wealth for investors, the company's return on equity must exceed its cost of equity.
- In theory, when a company sees no attractive growth opportunities, it should payout all earnings as dividends (yeah right, like corporate executives are going to do that!).
- PVGO allows analysts to calculate how much growth opportunities contribute to a company's current share price.
PVGO = Price0 - (Earnings current period / rce)
If a company has a stock price of $75 and the PVGO calculation is $50, then growth opportunities contributes 2/3rds of the share valuation.
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