Peter Lynch Fair Value Calculator
The Peter Lynch Fair Value Calculator helps investors estimate a stock's intrinsic value based on its earnings per share (EPS) and its expected annual EPS growth rate. Peter Lynch, a legendary investor, famously advocated for buying companies where the P/E ratio was roughly equal to its earnings growth rate. This principle suggests that a stock is fairly valued when its P/E ratio matches its growth rate, indicating "growth at a reasonable price" (GARP).
Understanding Peter Lynch's Approach
Peter Lynch, during his tenure at Fidelity's Magellan Fund, achieved extraordinary returns by focusing on companies he understood well and whose stock prices were justified by their earnings growth. His core philosophy, often summarized as "growth at a reasonable price" (GARP), emphasizes that a company's P/E ratio should ideally be in line with its earnings growth rate.
Key Concepts:
- Earnings Per Share (EPS): This is a company's profit allocated to each outstanding share of common stock. It's a key indicator of profitability.
- Annual EPS Growth Rate: This is the expected percentage increase in a company's EPS over the next year or several years. It reflects the company's growth prospects.
- Fair P/E Ratio: According to Lynch's principle, a stock is fairly valued when its P/E ratio is approximately equal to its annual EPS growth rate. For example, if a company is growing its EPS at 15% per year, a fair P/E ratio would be around 15x.
- Fair Stock Price: Once the fair P/E ratio is determined, you can multiply it by the current EPS to estimate a fair stock price. If the current market price is significantly below this fair price, it might be considered an undervalued opportunity.
How to Use This Calculator:
Enter the company's current Earnings Per Share (EPS) and its projected Annual EPS Growth Rate (as a percentage). The calculator will then provide an estimated Fair P/E Ratio and a Fair Stock Price based on Peter Lynch's valuation principles.
Example:
Let's say Company A has a Current EPS of $2.50 and an expected Annual EPS Growth Rate of 15%.
- Current EPS: $2.50
- Annual EPS Growth Rate: 15%
Using the calculator:
- Fair P/E Ratio: 15x (equal to the growth rate)
- Fair Stock Price: $2.50 (Current EPS) * 15 (Fair P/E) = $37.50
If Company A's current stock price is, for instance, $30.00, this calculator would suggest it might be undervalued according to Peter Lynch's criteria. Conversely, if the stock price was $45.00, it might be considered overvalued.
It's important to remember that this is a simplified model based on one aspect of Peter Lynch's extensive investment philosophy. Always conduct thorough due diligence and consider other financial metrics and qualitative factors before making investment decisions.
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function calculatePeterLynchFairValue() {
var currentEPSInput = document.getElementById("currentEPS").value;
var epsGrowthRateInput = document.getElementById("epsGrowthRate").value;
var currentEPS = parseFloat(currentEPSInput);
var epsGrowthRate = parseFloat(epsGrowthRateInput);
var resultDiv = document.getElementById("peterLynchResult");
resultDiv.innerHTML = ""; // Clear previous results
if (isNaN(currentEPS) || currentEPS < 0) {
resultDiv.innerHTML = "Please enter a valid positive number for Current Earnings Per Share.";
return;
}
if (isNaN(epsGrowthRate) || epsGrowthRate < 0) {
resultDiv.innerHTML = "Please enter a valid positive number for Annual EPS Growth Rate.";
return;
}
// Peter Lynch's principle: Fair P/E Ratio = Annual EPS Growth Rate (as a multiple)
var fairPERatio = epsGrowthRate;
// Fair Stock Price = Current EPS * Fair P/E Ratio
var fairStockPrice = currentEPS * fairPERatio;
resultDiv.innerHTML =
"
Calculated Fair Value:" +
"Fair P/E Ratio:
" + fairPERatio.toFixed(2) + "x" +
"Fair Stock Price:
$" + fairStockPrice.toFixed(2) + "";
}