In our new Valuation Box feature we are displaying a valuation
parameter called "Peter Lynch Fair Value." In the updated 10-year
financial page we have also added the historical quarterly Peter
Lynch Fair Value of companies. We have gotten a lot of questions
about "Peter Lynch Fair Value," so we would like to clarify the
concept with this article.
Before we start, this is the valuation box for WalMart (
How to calculate "Peter Lynch Fair Value"?
Peter Lynch Fair Value is calculated based on Lynch's famous rule
of thumb: He is willing to buy a growth company at a P/E multiple
that is equal to its growth rate. Therefore, to Peter Lynch, at
fair value, the PEG ratio of a growth company should be 1.
Because of this, the calculation of Peter Lynch Fair Value is
very straightforward. It simply equals to the growth rate
multiplied by its earnings. That is:
Peter Lynch Fair Value = Earnings Growth Rate * Earnings.
Therefore, if a company grows its earnings 20% a year, to Peter
Lynch, its fair valuation is 20 times its earnings.
In our articles
New Feature Added: Valuation Box
How to calculate the intrinsic value of a
, we wrote the formula in this format:
Peter Lynch Fair Value = PEG * Earnings Growth Rate * Earnings.
In this formula, PEG =1, as we should note even more.
What you need to know about "Peter Lynch Fair
Please note that we use EBITDA growth rate as the earnings growth
rate here. The reason we use EBITDA growth rate is because this
rate is less subject to management manipulations and distortions
from one-time corporate events.
Just as any other valuation methods we use in the Valuation Box,
Peter Lynch Fair Value has its limitations. It tends to
underestimate slower growing companies, and overestimate fast
growing companies. And it assumes that the company will grow in
the future as fast as it did in the past, which is usually not
In our calculations, we only apply Peter Lynch Fair Value to
companies that grow between 8% a year and 25% a year. If a
company grows faster than 25% a year, e.g. Apple (
) and Questcor Pharmaceuticals (
), we use 25 for the PE multiple.
Peter Lynch Fair Value has been displayed for all the stocks when
this is applicable. It is also in the new "Valuations" tab for
Gurus' portfolios. For instance, Peter Lynch Fair Values of all
Warren Buffett's stocks are here
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