# Calculating a stock's price target

In the book 'Insider Buy Superstocks', he seems to be calculating price targets like this:

``````[last quarter EPS] x 4 x PE = price target
``````

Does that look correct?

Is he basing PE off the current stock price?

On page 105, he uses the example of an \$11 stock with an EPS of \$0.35 and PE multiple of 20. The price target looks like this:

``````\$0.35 x 4 quarters = \$1.40 x 20PE = \$28.
``````

Where does the 20PE come from? Shouldn't PE be \$11/.35 = \$31.43.

CVRR's last earnings were \$2.3. It's current price is \$24.25. That would give it a target of 2.3 x 4 x (24.25/2.3) = 9.2 x 10.54 = \$96.97, which is highly unlikely anytime soon.

• Maybe the writer has decided that the target of all stocks is a PE of 20. – mhoran_psprep Sep 23 '13 at 17:21

The price-earnings ratio is calculated as the market value per share divided by the earnings per share over the past 12 months.

In your example, you state that the company earned \$0.35 over the past quarter. That is insufficient to calculate the price-earnings ratio, and probably why the PE is just given as 20.

So, if you have transcribed the formula correctly, the calculation given the numbers in your example would be:

0.35 * 4 * 20 = \$28.00

As to CVRR, I'm not sure your PE is correct. According to Yahoo, the PE for CVRR is 3.92 at the time of writing, not 10.54. Using the formula above, this would lead to:

2.3 * 4 * 3.92 = \$36.06

That stock has a 52-week high of \$35.98, so \$36.06 is not laughably unrealistic. I'm more than a little dubious of the validity of that formula, however, and urge you not to base your investing decisions on it.

• Thanks Chris. My EPS is \$2.3 and the one from NASDAQ is also \$2.3. Why do you say it might be incorrect? – 4thSpace Sep 23 '13 at 16:57
• Ah, thanks. Yes, I meant your PE. You show a PE of 10.54, but Yahoo lists 3.92. I'll edit my answer. – ChrisInEdmonton Sep 23 '13 at 16:59
• How do you calculate earnings per share over twelve months? Take the last 4 quarters and average? If you don't like the above formula for calculating a target price, what are you using? – 4thSpace Sep 23 '13 at 19:35
• To calculate the EPS over twelve months, sum up the earnings over the last twelve months and divide by the total shares. – ChrisInEdmonton Sep 23 '13 at 21:34
• The question is where did the 20 come from? You havent answered that. – geodex Sep 13 '16 at 22:27

## protected by Chris W. ReaOct 22 '17 at 3:01

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