Educational Programming Video
The Value Line Investment Survey
Program 6: Value Line's 3 to 5 Year Forecasts and Projections
In our last two sessions we discussed Value Line's Timeliness, Safety, and Technical ranks, as well as Beta. The three ranks, in particular, are keys to Value Line's approach to investing. However, there is much more information on each Value Line stock page.
We're now going focus on Value Line's 3- to 5-year forecasts and projections. For this discussion, and most of the others we are planning, it probably makes sense for you to have a copy of a Value Line company report page in front of you. If you don't already have one, you can find some sample pages on our Web site. There is also a sample page in the publication "How to Invest in Common Stocks," which is available on our Web site.
Value Line actually makes two types of forecasts. One is a forecast of financial items in the income statement (sales, taxes, earnings, etc.) and balance sheet (shareholders' equity, long-term debt, working capital, etc.); the other is a forecast of a stock's price.
You might ask why we forecast a period out 3 to 5 years, and not simply a single year 3 or 5 years in the future. The reason is that the farther into the future, the more difficult and uncertain a projection is. It is tough enough to estimate what a company will do in the current year, but it is a lot tougher to estimate the next year, and trying to estimate a single year three or five years into the future is almost impossible. Even the top executives of most companies are unwilling to make a specific estimate of results out that far. What Value Line does is to use our best judgement to forecast what a company's financial results and condition might be on average in the three years 3 to 5 years from now. The numbers are not meant to be precise, but simply a general guideline of what we think the future might bring.
Our financial forecasts are included in what we call the "statistical array;" this is the section in the center of the report where most of the numbers are. Here, Value Line includes up to sixteen years of historical financial data. We also generally provide estimated data for three periods: the current year, the next year, and the period out 3 to 5 years. You can tell which numbers are estimates because they are in italics.
The estimates of sales, earnings, profit margins, tax rates, etc. are all derived from spreadsheets maintained on every company by each of our analysts. The numbers are based on an analyst's latest thinking about where a company may be 3 to 5 years in the future. The forecasts are based on many things, including a thorough review of a company's most recent results, the growth expected for a company's products, an examination of its planned capital expenditures and overall financial condition, the current and expected competitive situation, Value Line's own economic forecasts, and, usually, a discussion with management. The projections are typically adjusted every quarter. For those of you who would like to know more about making sales, earnings, and other financial forecasts, possibly because you want to make your own projections, we will go into some more detail in a later session.
In the left-hand column below the Value Line Ranks, there is a Projections box. Here we show the potential high and low prices for the stock in the period out 3 to 5 years. (These projections, by the way, are derived from taking the earnings per share forecast and the price/earnings forecast from the statistical array in the center of the report.) Next, we show what the percentage stock price appreciation or depreciation would be if the Value Line high or low price targets are met. The percent gain or loss is simply a calculation of the percent difference between the projected price and the current price shown at the top of the page. And finally we show the potential compound annual total return, which is the expected price appreciation or depreciation plus cash dividends, of the stock if it trades at the high and low prices we forecast. To calculate the total return number, we assume the reinvestment of dividends, and then use the standard (though somewhat complicated) formula for compound rate calculations.
In the upper right-hand portion of each report is a Target Price Range. This is also based on Value Line's projected annual high/low price range of the stock out 3 to 5 years. The high and low prices are the same ones that appear in the Projections box on the left.
There is a great deal of information about Price/Earnings ratios on a Value Line report, and we are going to tackle some of it in our next session.
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