Earning Power Value (by ATC)
1.
EPV (by Bruce Greenwald)
= Adj Earning ÷ WACC_ratio
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2.
Bruce Greenwald uses two variables, Earning and WACC, in the EPV formula.
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The position arrangement in the formula is improper and irrational in my view.
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3.
WACC is not a Real Cost of Operation.
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I suggest the term WACC should be replaced by Potential Matured Profitability (PMP).
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ROIC and PMP belong to the same Profitability family.
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I will use PMP to replace WACC to reflect a real and meaningful term.
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That means EPV (by Bruce Greenwald) is proportional to the inverse of Potential Matured Profitability (PMP), it is ridiculous.
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4. I would fix the EPV with 3 variables, EPS, ROIC & PMP in the following arrangement :
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EPV (by ATC)
= EPS × √(ROIC × PMP)
or
EPV (by ATC)
= EPS × 100 × { √[ (1+ROIC_ratio)×(1+PMP_ratio) ] - 1 }
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5.
Remarks :
EPV (by ATC) ≠ Intrinsic Value
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In short, EPV (by ATC) indeed is very conservative, indeed very low.
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For Company with competitive advantage, it will always have ROIC > PMP in the short and long run.
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For Company with no competitive advantage, its ROIC will revert to PMP in the long run.
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IF YOU like further to have an absolute formula for Earning Power Value to reflect fully the Intrinsic Value, I would firmly quote :
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Present Intrinsic Value
= Present EPV (by ATC)
= EPS TTM × ROIC TTM
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In any sort of evaluation, the financial metrics such as EPS and financial ratios such as ROIC are always have to be readjusted to remove the impurities of unrealized fair value gain and one time non-recurring gain.
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What value shall PMP resume?
I think the 10Y Government Bond Rate is quite suitable to be used as PMP in EPV and as Discount Rate in Discounted Free Cash Flow formula.
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For your information, Warren Buffett has suggested to use 10Y Government Bond Rate as Discount Rate.