A Quick Guide To Our Forecasting View

Introduction

The EDMP, Inc. Fundamental Analyzer™ is designed as a tool to help us determine the future fair, or intrinsic value of a business. In short, it focuses on the present and future operating results of the companies it represents.

Sections To Focus On

There are actually three important parts of our forecasting view. The first is the price line (weekly closing prices). Our price line is just like the price line on any other charts and is merely plotted.

Estimated Earnings Growth Rate

The second, and most important part of this graph is the Estimated Earnings Growth Rate. On its default setting the Estimated Earnings Growth Rate line is created by multiplying each year's earnings by the current 5 year consensus estimate of America's leading analysts that follow the company as reported by FirstCall Corporation. The Estimated Earnings Growth Rate area attempts to forecast the future value of the company.

In this example, our estimated earnings growth rate is 12.4%. The Estimated Earnings Growth Rate line begins with the actual consensus earnings estimate for this year as reported by the analysts. Next, we plot each future year's estimated earnings number by growing this year's estimate by the consensus estimated future growth rate and draw a triangle symbol (). Then, we simply connect the dots, or triangles, to create the Estimated Earnings Growth Rate area showing a mountain of earnings.

The result is the green area plotting each year's estimated earnings times its growth rate. You will notice that the EPS (earnings per share) numbers at the bottom of the chart are marked with an E connotating an estimate. The number of analysts comprising the estimate is shown at the bottom right of the chart. In essence, the Estimated Earnings Growth Rate area provides a picture of the company's forecasted operating results, and also represents the company's forecasted fair, or intrinsic, value so that value = PE = growth rate (PE stands for Price Earnings ratio).

Value Corridor

The two orange lines on each side of the Estimated Earnings Growth Rate line are the value corridor, representing a 10% plus or minus factor for error.

The green line on our forecasting charts is called the Estimated Earnings Growth Rate, and is the only line that represents a growth rate. It also represents a price earnings ratio that is equal to its respective forecast growth rate.

The two orange lines and the four blue lines are parallel lines that represent various price earnings ratios keyed of the estimated earnings growth rate.

The completed forecasting chart above brings in the price line. When the price touches the Estimated Earnings Growth Rate line or is inside the value corridor (orange lines), the company is theoretically fairly priced. If the stock price is above these lines it is over priced; conversely, if the price is below this value corridor it is undervalued. In our Wal-Mart example, it is clearly overvalued. When the PE is more than 50% over the Estimated Earnings Growth Rate line, a red line is plotted, which, like the blue and orange lines, is parallel to the Estimated Earnings Growth Rate line.

For more detailed information on how to use these powerful tools more effectively, refer back to EDMP charting.