A Quick Guide To Our Historical View

Introduction

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

Two Powerful Lines

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

Where our charts differ from traditional charts is with the two powerful lines marked Earnings Growth Rate and Normal PE Ratio. Once understood, these lines are easy to use and an excellent tool for the true long-term investor.

Earnings Growth Rates

The Earnings Growth Rate is calculated specific to each company being charted. It represents the Earnings Growth Rate of the company's earnings for any time period chosen. Simply stated, it tells you how fast the company has grown its profits or earnings.

The company's EPS (earnings per share) is listed at the bottom of the chart above. In our example company, the EPS grew from $0.10 in 1983 to $1.55 in 2001. An estimated $1.65 is shown for 2002, denoted by an E.

In this example, we simply calculate the compounded growth rate of earnings from $0.10 in the first year to $1.55 in the last year (2002 has an estimated number). In the example, our growth rate is 14.5%. Next, we multiply each year's EPS (earnings per share) by this ten year annualized compounded growth rate and draw a triangle symbol (). Then, we simply connect the dots or triangles to create the Earnings Growth Rate line. The result is a volume of earnings, where the Earnings Growth Rate line plots each year's earnings times its growth rate. In essence, this is a picture of the company's operating results, which also represents the company's fair or intrinsic value (value = PE = growth rate).

The Earnings Growth Rate line has a second identity. It also represents a PE ratio (Price Earnings Ratio) equal to the company's growth rate. Anywhere the stock price touches the Earnings Growth Rate line, the company is trading at a PE ratio equal to the growth rate. In our example, the PE ratio and the equivalent earnings growth rate is 14.5. In theory, when the stock price touches this line, the company is fairly valued, if the price is below this line it is undervalued, and if the price is above this line it is overvalued.

Normal PE Ratio

The Normal PE Ratio line is a line that attempts to identify the price earnings ratio (PE) that the company most commonly trades at. Its primary purpose is to provide the user a perspective of a company's normal valuation as it relates to a company's operating results. Used in conjunction with the Earnings Growth Rate line, the Normal PE Ratio line provides added perspective regarding whether a company is fairly priced, under priced, or overpriced at any specific point in time. A complete chart that shows all three lines is provided below.

The EDMP Historical View

As you can see, the EDMP historical charts are easy to learn and easy to use. After using our charts, you will soon realize that on chart after chart, a company's stock price will closely correlate to the company's earnings. Our EDMP historical charts are also flexible, allowing you to create historical charts on more than 10,000 companies from 2 to up to 20 years of history. Additionally, with our historical review section, you can evaluate any specific time period in the company's history you may wish to review. (All data provided courtesy of Standard & Poors.)

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