Professional Stock Valuation Model

By Author: Alexander Chepakovich
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The Chepakovich Stock Valuation Model uses the DCF valuation approach. It was first developed by Alexander Chepakovich in 2000 and perfected in subsequent years. The model was originally designed for valuation of 'growth stocks' (common shares of companies experiencing high revenue growth rates) and has been successfully applied to valuation of high-tech companies, even those that do not generate profit yet. At the same time, it is a general valuation model and can also be applied to no-growth or negative-growth companies. In a limiting case, when there is no growth in revenues, the model yields similar (but not the same) valuation result as a regular DCF to equity model.

The key distinguishing feature of the Chepakovich Stock Valuation Model is separate forecasting of fixed (or quasi-fixed) and variable expenses for the valuated company. Though intuitively obvious, this approach so far has not been used in valuation models, apparently, due to the custom to use the same line items as in financial statements where variable and fixed expenses are not separated. The model presented here assumes that fixed expenses will only ...
... change at the rate of inflation or other predetermined rate of escalation, while variable expenses are set to be a fixed percentage of revenues (subject to efficiency improvement/degradation in the future - when this can be foreseen).

This feature makes possible valuation of start-ups and other high-growth companies on a fundamental basis, i.e. with determination of their intrinsic values. Such companies initially have high fixed costs (relative to revenues) and small or negative net income. However, a high rate of revenue growth insures that gross profit (defined here as revenues minus variable expenses) will grow rapidly in proportion to fixed expenses. This process will eventually lead the company to predictable and measurable profitability in the future.

Other distinguishing and original features of the Chepakovich Stock Valuation Model are: 1) time-variable discount rate - to reflect investor’s time-dependent required rate of return and risk of investment; 2) company’s investments in means of production is set to be a function of the revenue growth (there should be enough production capacity to provide increase in production/revenue); 3) long-term convergence of company’s revenue growth rate to that of GDP; 4) actual cost of stock-based compensation of company’s employees that does not show in the company’s income statement is subtracted from the cash flow; 5) it is assumed that, subject to availability of the necessary free cash flow, the company’s capital structure (debt-to-equity ratio) will converge to optimal.

An online version of the Chepakovich Stock Valuation Model with input parameters for around 1600 stocks can be found at the iStockResearch.com website.
About Author:
Alexander Chepakovich (born in 1963) is a CFA charterholder and is a graduate of the Belarusian National Technical University (1985, Thermal Power Plants Engineering), the University of British Columbia (1993, Master of Applied Science) and McGill University (2000, MBA - Finance). In various capacities he worked at Gomel Power Plant 2, General Electric Company, Bank of Canada, ABN Amro Bank, Commerzbank, Edward Jones, and ING Bank. Currently, Alexander is at the European Bank for Reconstruction and Development (EBRD) in Moscow, Russia, where he is in charge of the Power and Energy Utilities team.
Besides other things, Alexander is an expert in valuation and is the author of the Chepakovich Stock Valuation Model, an online version of which is implemented at the iStockResearch.com website.