The father of value investing (Benjamin Graham) created two financial models: 1) Graham Formula and 2) Graham Number. By combing the two ideas, I developed the Graham Fusion model. This article explains this modern twist of two timeless principles.

To explain how I came up with the Graham Fusion model I first need to review the basic Graham Formula and Graham Number.

# What is the Graham Formula?

V = EPS * (8.5 + (2 * g))

Where:

- V = Intrinsic value
- EPS = Trailing 12-month earnings per share
- 5 = P/E base for a no-growth company
- g = reasonably expected 7 to 10-year growth rate

For more about the Graham Formula, please see the following link:

https://en.wikipedia.org/wiki/Benjamin_Graham_formula

# What is the Graham Number?

Graham Number = (22.5 * EPS * BVPS) ^ 0.5

Where:

- 5 = 15 multiplier for earnings times 1.5 multiplier for book value
- EPS = Trailing 12-months earnings per share
- BVPS = Book value per share

For more about the Graham Formula, please see the following link:

https://en.wikipedia.org/wiki/Graham_number

# What is the Graham Fusion model?

By rearranging the Graham Formula, you get V/EPS = (8.5 + (2 * g)). Essentially, V/EPS is a fair price earnings multiple (PE multiple). Then I insert this in place of the 15 multiplier in the Graham Number. By using (8.5 + (2 * g)), you incorporate a dynamic PE multiple based on growth, which is better than the static 15 multiplier.

What I found the 1.5 multiplier for book value did not always make sense. Certain sectors and industries have different acceptable price to book ratios. As a result, you use a normalized sector or industry price to book ratio.

Therefore, the Graham Fusion model is:

- ((8.5 + (2 * g)) * Normalized Sector or Industry Price to Book Ratio * EPS * BVPS) ^ 0.5

You can find Industry Price to Book Ratios at the following link:

http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/pbvdata.html

# How good is this valuation method?

Let’s check trusted sources to see how this method holds up.

Morningstar’s Fair Value Estimate for Apple it is $133.00

Value Line’s Target Price Range for Apple is $150.00 to $205.00

Based on the following assumptions:

- EPS growth rate of 9.23%
- Normalized Industry Price to Book Ratio of 2.72
- EPS = $9.04
- BVPS = $23.66

Apple’s Graham Fusion number is:

- $125.24 = ((8.5 + (2 * 9.23)) * 2.72 * 9.04 * 23.66) ^ 0.5

# Conclusion

This is an improvement to the original financial models. Compared to Apple’s Graham Formula of $243.72 = 9.04 * (8.5 + (2 * 9.23)) or Apple’s Graham Number of $69.37 = ((15 * 1.5 * 9.04 * 23.66) ^ 0.5, the Graham Fusion appears to be a better valuation model. Hope this new valuation model helps increase the value of your portfolio!

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