How to Calculate Stock Target Prices

Calculating stock target prices relies on a blend of hard data, financial projections, and individual intuition. Although stock targets are frequently adjusted and rarely precise, you can use them as guideposts as to the fortunes of a stock and its underlying company. Additionally, stock target prices based on solid fundamental analysis can help you determine whether a stock is undervalued.

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The basis of any stock target price is the earnings of the underlying company, as this number plugs directly into the calculation for estimating stock prices. Earnings-per-share estimates for all companies, particularly for actively-traded companies, are easy to find in the financial news media.

If you cannot find estimated earnings online, on television or in the financial press, you can always call the company's investor-relations department. It will be happy to provide you with a summary of analysts' earnings estimates for the company.

An earnings multiple, also known as a "price-earnings ratio," roughly translates to how much investors are willing to pay for each dollar of earnings for a company.

Popular, high-growth stocks, such as technology stocks, often sell for high earnings multiples, as investors anticipate higher earnings returns for their money. On the contrary, low-growth stocks such as utilities often carry low earnings multiples, as there is little chance of dramatic growth in earnings at such predictable companies.

Usually, stocks within a defined industry trade at a fairly similar earnings multiple. As with company earnings estimates, average industry price-earnings ratios are available in the financial news media and from investor-relations departments.

Although companies in an industry tend to trade at roughly the same multiple, some trade at premiums to the average, while others trade below. Based on your analysis of a company's earnings growth rate, management team, new product pipeline, and consistency of results, you should adjust your estimated earnings multiple for a company slightly upward or downward, to reflect its position relative to its industry peers.

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Multiply the company's projected earnings by your estimated multiple. The earnings-per-share estimate times your adjusted multiple will equal your stock target price. For example, if a company is estimated to earn $2 per share and you estimate its earnings multiple at 20, then your stock target price is $40 per share.