106 The Business of Value InvestingValue Investing 401: Calculating
a True Intrinsic Value
By now it is clear why the concept of margin of safety, the reliance
on intrinsic value to make investing decisions, and the value of great
businesses with wide economic moats is central to the value invest-
ing approach. Once you ’ ve taken those steps and found a business
that looks attractive, you next need to determine the intrinsic value
of that business, to fi nd out whether an undervalued investment
opportunity exists. In Chapter 10 , some case studies illustrate both
the qualitative and quantitative connection in valuing a business.
But for now, let ’ s calculate the intrinsic value of a real life publicly
traded company using actual fi nancial statement numbers. Keep
in mind that this example is provided merely to illustrate how you
would go about using the actual numbers from a company ’ s actual
operating results.
As a refresher, intrinsic value is determined by the cash infl ows
and outfl ows — discounted at an appropriate interest rate — that can
be expected to occur during the remaining life of the business.
This defi nition is painfully simple, but it works. Let ’ s apply it to
a couple of businesses so you can see for yourself.Intrinsic Value Analysis: ENSCO Corp
Ensco is one of the world ’ s premier global offshore oil and gas drill-
ing contractors. It charters out its fl eet of offshore oil drilling rigs to
various oil companies all over the world. For those unfamiliar with
the oil industry, oil rigs or oil platforms are the large structures that
oil companies use to drill wells into the ocean bed, extract oil, and
ship the oil back to shore. Table 6.3 is a condensed cash fl ow state-
ment taken from Google Finance.
In looking at Table 6.3 , the number needed is the free cash fl ow
fi gure, which we have to calculate. Free cash fl ow simply defi ned
is equal the cash fl ow from operating activities (CFFO) less capitalCH006.indd 106CH006.indd 106 9/2/09 6:58:08 PM9/2/09 6:58:08 PM