Is DCC plc (LON:DCC) Trading At A 49% Discount?
DCC's estimated fair value is UK£93.06 based on 2 Stage Free Cash Flow to Equity
Current share price of UK£47.18 suggests DCC is potentially 49% undervalued
The UK£63.08 analyst price target for DCC is 32% less than our estimate of fair value
Does the June share price for DCC plc (LON:DCC) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. It may sound complicated, but actually it is quite simple!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF (£, Millions)
UK£458.9m
UK£504.1m
UK£532.4m
UK£575.8m
UK£609.2m
UK£638.6m
UK£665.0m
UK£689.3m
UK£712.2m
UK£734.1m
Growth Rate Estimate Source
Analyst x5
Analyst x8
Analyst x8
Analyst x6
Est @ 5.79%
Est @ 4.82%
Est @ 4.13%
Est @ 3.66%
Est @ 3.32%
Est @ 3.09%
Present Value (£, Millions) Discounted @ 8.7%
UK£422
UK£427
UK£415
UK£413
UK£402
UK£388
UK£371
UK£354
UK£337
UK£319
("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = UK£3.8b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.7%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = UK£734m× (1 + 2.5%) ÷ (8.7%– 2.5%) = UK£12b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£12b÷ ( 1 + 8.7%)10= UK£5.3b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is UK£9.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of UK£47.2, the company appears quite undervalued at a 49% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at DCC as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.7%, which is based on a levered beta of 1.196. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
View our latest analysis for DCC
Strength
Debt is not viewed as a risk.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Industrials market.
Opportunity
Annual earnings are forecast to grow faster than the British market.
Good value based on P/E ratio and estimated fair value.
Threat
Dividends are not covered by earnings.
Annual revenue is forecast to grow slower than the British market.
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For DCC, we've put together three further items you should assess:
Risks: You should be aware of the 2 warning signs for DCC we've uncovered before considering an investment in the company.
Future Earnings: How does DCC's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the LSE every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Try Our AI Features
Explore what Daily8 AI can do for you:
Comments
No comments yet...
Related Articles
Yahoo
2 days ago
- Yahoo
NCC Group Reports First Half 2025 Earnings
Net income: UK£16.0m (up by UK£16.0m from 1H 2024). EPS: UK£0.052. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. All figures shown in the chart above are for the trailing 12 month (TTM) period Looking ahead, revenue is forecast to grow 2.3% p.a. on average during the next 3 years, compared to a 7.9% growth forecast for the IT industry in the United Kingdom. Performance of the British IT industry. The company's shares are down 11% from a week ago. We should say that we've discovered 1 warning sign for NCC Group that you should be aware of before investing here. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
2 days ago
- Yahoo
Johan Holdings Berhad Third Quarter 2025 Earnings: EPS: RM0.007 (vs RM0.008 loss in 3Q 2024)
Net income: RM8.15m (up from RM8.78m loss in 3Q 2024). EPS: RM0.007 (up from RM0.008 loss in 3Q 2024). We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. All figures shown in the chart above are for the trailing 12 month (TTM) period Johan Holdings Berhad shares are up 20% from a week ago. You should always think about risks. Case in point, we've spotted 3 warning signs for Johan Holdings Berhad you should be aware of, and 2 of them are concerning. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Sign in to access your portfolio
Yahoo
2 days ago
- Yahoo
Johan Holdings Berhad Third Quarter 2025 Earnings: EPS: RM0.007 (vs RM0.008 loss in 3Q 2024)
Net income: RM8.15m (up from RM8.78m loss in 3Q 2024). EPS: RM0.007 (up from RM0.008 loss in 3Q 2024). We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. All figures shown in the chart above are for the trailing 12 month (TTM) period Johan Holdings Berhad shares are up 20% from a week ago. You should always think about risks. Case in point, we've spotted 3 warning signs for Johan Holdings Berhad you should be aware of, and 2 of them are concerning. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
