Evaluating Common Stocks Using Value Line's Projected Cash Flows and Implied Growth Rate

Abstract

This article applies the discounted cash flow (DCF) approach to the data supplied by Value Line to estimate the implied long-term growth rate of the firm's equity cash flows. This rate is then contrasted with various subjective expected rates in the form of a sensitivity analysis. If the implied growth rate is lower than what an investor would have expected, the stock may be underpriced, or, alternatively, the current price does not truly reflect the long-term growth rate in the firm's cash flows. Conversely, if implied rate is greater than the expected growth rate, the stock may be considered overpriced. Application of the proposed methodology to MCI's stock produces intriguing and promising results.