I'm currently reading The Intelligent investor, by Benjamin Graham. On pages 54-55, he outlines a formula to use to evaluate a company to make sure you aren't overpaying for it. I thought it would be interesting to apply this to Lumber Liquidators.
The first test he uses is to find an average earnings per share for the past 7 years, and not to pay more than 25 times that. A 7 year check of LL earnings per share gives us:
.82, .97, .93, .93, 1.68, 2.77, 2.31 = average earnings of $1.48 over the period
25 times $1.48 equals $37
This means that the first test would tell us not to pay more than $37 for a share of LL.
However, there is also a second test, which says not to pay more than 20 times the earnings for the prior year period. Earnings for 2014 were $2.31 per share. Using that metric, we should not pay more than about $46 per share for the company. Over the past 12 months, adding the 29c earnings loss just announced, we get earnings per share of $1.53. Multiply that by 20 and you get $30.60 per share.
The $30.60 per share is the lowest number, so it should be used. According to The Intelligent Investor, we should not pay more than $30.60 per share for LL.
negatives: cyclical drop in sales, negative perception lingering probably 18 months
positives: chain store growth continues, profits were fairly level to growing before 60 minutes report,
study cited in that report is likely quite biased and flawed
I understand, but in order to truly evaluate the entire ETF using the earnings formula found in the book "The Intelligent Investor", I would need to know the overall earnings, correct? The only way I can think of to find this for an ETF would be to add up all the outstanding shares of stock in all of the companies. Next, I guess I would add up all the earnings for all of the companies, right? Then I suppose I would divide the total earnings by the total shares of stock to find the total earnings per share. I was just hoping that someone else might have already done this.