Forecasting the Stock Price for Publicly Traded Companies

Warrant Buffet uses the earnings per share (EPS) to project the stock price for publicly traded companies. One of his requirements to calculate the stock price is to have ten years’ worth of historic EPS. To be more specific, the EPS should be steady, not erratic. This article is going to demonstrate Buffet’s method for projecting the stock price.

To demonstrate an example by using the historical EPS for Boeing Company (BA):

Year	EPS $
2004	$   2.30
2005	$   3.20
2006	$   2.85
2007	$   5.28
2008	$   3.67
2009	$   1.84
2010	$   4.45
2011	$   5.34
2012	$   5.11
2013	$   5.96

Source: Yahoo. Finance

Begin by looking at the Boeing Company’s (BA) historical EPS as an example. It has a consistent EPS, and it fulfills the requirement to project the company’s stock price.

Step 1: Compound annual Growth Rate should be used to calculate rate of an investment over a specific period of time. You can use Texas Instruments BA II plus Financial Calculator to calculate the compound annual growth rate:

$  2.30                Present Value

$ 5.96                 Future Value  

9                        Number of Year

As a result, the compound annual growth rate is %11.16

Step 2: You should use Texas Instruments BA II plus Financial Calculator to project the EPS in 2022

$ 5.96                    Present Value

11.16 %             Growth Rate 

9                        Number of Year

Therefore: The Earning per share will be $ 15.44 in 2022

$ 15.44               Future Value

Step 3: To better project the stock price of 2022, you have to select the lowest price-earning (P/E) ratios between 2004 and 2013. The lowest P/E ratio between 2004 and 2013 was 11.7 (in 2008).  

If you take Boeing's projected 2022 per share earnings of $ 15.44 and multiply it by 11.7, you get a projected market price of $ 180.65 a share.

The question is: If the EPS is erratic, can we still use Buffet’s method to estimate stock price?

Scenario: Let us pretend the current year is 1995, and we are trying to project stock price for the Boeing Company in 2006.

Year	EPS
1995	0.575
1994	1.255
1993	1.830
1992	0.810
1991	2.280
1990	2.010
1989	0.980
1988	0.900
1987	0.690
1986	0.950
1985	0.840
1984	1.200

 Source: Ychart.com 

Step 1: Compound Annual Growth Rate should be used to calculate rate of an investment over a specific period of time. 

$ 1.200               Present Value

 $0.575               Future Value  

11                      Number of Year

Therefore, the compound annual growth rate is  -6.469%.
The compound annual growth rate is negative because the EPS was fluctuating during this period. As a result, it is very difficult to project the stock price in this situation in which the EPS is not growing at a steady rate. Let us continue the process to find out the stock price estimation.  

Step 2 :You should use Texas Instruments BA II plus Financial Calculator to project the EPS

$ 0.575               Present Value

-6.469%             Growth Rate  

11                       Number of Year

As a result,  the Earning per share will be $ .275 in 2006

$ .2755               Future Value

Step 3: To better project the stock price of 2006, you have to select the lowest P/E ratios between 1984 and 1995. The lowest P/E ratio between 1984 and 1995 was 7.403. 

If you take Boeing's projected 2006 per share earnings of $ .2755 and multiply it by 7.403, you get a projected market price of $ 2.03 a share

In conclusion, it is difficult to estimate the stock price for a company that has an erratic EPS. For instance, BA had an erratic EPS between 1984 and 1995, so it was hard to project its stock price in 2006. Based on Warren Buffet’s methodology, the stock price was estimated to be around $2.04, but the real stock price was $68.31.