Implied Growth

Benjamin Graham, sometimes called the father of value investing, proposed a practical and easily calculated formula for estimating the intrinsic value of a growth stock in his pioneering treatise on fundamental analysis, “Security Analysis,” co-written with David Dodd and first published in 1934. Don’t be put off by the algebraic formulas that follow. They’re included to justify the result. In the end, all you’ll have to do is look up implied growth on Table 5-1. Graham and Dodd defined intrinsic value as:

Table 5-1. Implied annual EPS growth rates for various AAA corporate bond rates.
P/E5%6%7%8.8%
101%2%4%6%
152%6%8%11%
207%9%12%16%
2510%13%16%21%
3013%16%19%26%
3516%19%23%31%
4018%23%27%36%
5024%30%35%46%
6030%37%43%56%
8041%50%59%76% ...

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