For most valuation techniques, the future EPS growth rate is the
most important and influential factor in arriving at an accurate valuation. There
are a few simple methods we can use to estimate the future EPS growth rate.

__1) Obtain Data from Stock Research Website__

Future EPS growth rate is estimated by professional analysts on
a quarterly basis at a minimum. This estimate is available on most popular
stock research websites such as Yahoo Finance, MSN Money, Google Finance and
Bloomberg.

Steps :

b)
Enter the ticker of
the stock you are searching

c)
Click on

*Analyst Estimates*in the menu bar on the left side of the screen
d)
At the bottom of the
page is a section titled “Growth Est” – Look for Next 5 Years value.

We use Cisco Systems, Inc. (CSCO) as example.
The 8.33% is the number we’re after, and what it means is that CSCO
is expected to grow at an average rate of 8.33%

*each year*over the next 5 years.##
__2) Estimating future EPS growth
rates yourself__

The professionals don’t often agree with each other and if you
were to actually look at the numbers from msn
Money, the estimated growth rate is 9.70%. You can perform a sanity check
and attempt to estimate the EPS growth rate yourself to see how it compares. The
first step is to look at the past 10 years of earnings and sales data to
estimate future earnings. You can obtain the necessary inputs from msn Money by
clicking on

*10-YR Summary*. This provides us with EPS numbers (earnings) and revenue (sales) for each of the last 10 years.*Screenshot of 10-year summary from msn Money.*

Using a financial calculator, enter 0.50 (EPS for 2003) as PV
(present value), 1.49 (EPS for 2012) as FV (future value), 9 as N (no. of
Years) and you will get a growth rate of 12.9%

Although there are 10 EPS value from 2003 to 2012, we have only
9 growth period, therefore the value of N should be 9.

Note that the
point-to-point growth rate could change radically if we used two different
points. For example, if we calculated the 5-year EPS growth rate from 2004 to
2009, we would obtain 8.45%, but the five-year
rate from 2006 to 2011, is 5.62%. This radical change occurs because the
point-to-point rate is extremely sensitive to the beginning and ending years
chosen.

To alleviate the
problem of beginning and ending year sensitivity, we use an average-to-average
calculation. For example, to calculate CSCO’s EPS growth rate over the period
2006 to 2011, we would (1) get the average EPS over the years 2005 to 2007 and
use this value ($0.98) as the beginning year, (2) get the average EPS over the years
2010 to 2012 and use this value ($1.33) as the ending year, and (3) calculate a
growth rate of 6.30% based on these data. This procedure is superior to the simple
point-to-point calculation for purposes of estimating growth.

You can perform
the calculation using free online financial calculator here.

Our estimated
growth rate of 6.30% is lower than that of the analyst (8.33% from Yahoo
Finance and 9.7% from msn Money). In this case we might opt to err on the conservative side and
take the middle road between the analyst estimates and past history, and
predict say a 8% growth rate moving forward.

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