Fundamental Analysis Project
Book / Internal Value

 

Book Value

The book value is a very pessimistic estimation of a company's stock price, since it only accounts for a company's tangible assets.
However, it is the value that is the easiest to calculate and understand.

 We will first try plotting the actual stock value versus the book value for our complete set of companies:

 

 

 As we can see, the dashed line which is a trend line of the book values is far from the solid line which would mean a 100% accurate prediction of the actual price. Also, the R² value is very low, which suggests that many of the companies deviate significantly from the average. We will try braking down the graph to separate industries for more accurate conclusions.

 
       

 

 

We could not use linear regression, to show the average trend, so a moving average of 3-6 points was used instead.

 

From the above we see some trends:

 

  • Technology companies are more undervalued by the book value. A reason for that is the intellectual property, as well as other non tangible assets these companies hold.
  • Financial companies are the best predicted by book value. The reason is that they mostly deal with cash and investments, plus their buildings, and all of that is well documented in their annual statements.
  • There are some peculiar "spikes" in the moving average trend lines, that can only be explained with extra knowledge. For example the spike in Consumer Non-Cyclic graph is due to some smoke industries seeing their stocks fall after bad news about a multibillion dollar court decision.
  • The healthcare sector has a surprisingly low book value.  The next section will show us if the intangible assets will make up for the difference.

 

 

Internal Value

 

If we add the goodwill and the intangible value to the book value, we get a better estimation of the stock price. The R² value has increased significantly too. We will break up again by sector.

 

 
       


We can see that:

 

  • There is an improvement in our prediction, in some sector more than others.
  • The sectors that did not have a very low book value, like the financial sector, transportation or energy were not benefited.
  • The Technology sector was the most benefited, due to the reasons we already stated (i.e. patents, other intangible assets).