Latest news with #FCF
Yahoo
7 days ago
- Business
- Yahoo
Calculating The Intrinsic Value Of Service Corporation International (NYSE:SCI)
Using the 2 Stage Free Cash Flow to Equity, Service Corporation International fair value estimate is US$71.56 With US$78.48 share price, Service Corporation International appears to be trading close to its estimated fair value The US$88.88 analyst price target for SCI is 24% more than our estimate of fair value In this article we are going to estimate the intrinsic value of Service Corporation International (NYSE:SCI) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow. We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions) US$485.6m US$527.2m US$558.2m US$548.5m US$546.7m US$550.3m US$557.7m US$567.8m US$580.1m US$594.0m Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x1 Est @ -1.72% Est @ -0.33% Est @ 0.65% Est @ 1.34% Est @ 1.82% Est @ 2.16% Est @ 2.39% Present Value ($, Millions) Discounted @ 7.5% US$452 US$456 US$449 US$410 US$380 US$356 US$335 US$318 US$302 US$287 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$3.7b We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.9%) 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 7.5%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$594m× (1 + 2.9%) ÷ (7.5%– 2.9%) = US$13b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$13b÷ ( 1 + 7.5%)10= US$6.4b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$10b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$78.5, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out. Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 Service Corporation International 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 7.5%, which is based on a levered beta of 1.060. 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. Check out our latest analysis for Service Corporation International Strength Earnings growth over the past year exceeded its 5-year average. Debt is well covered by earnings and cashflows. Dividends are covered by earnings and cash flows. Weakness Earnings growth over the past year underperformed the Consumer Services industry. Dividend is low compared to the top 25% of dividend payers in the Consumer Services market. Opportunity Annual earnings are forecast to grow for the next 3 years. Good value based on P/E ratio compared to estimated Fair P/E ratio. Threat Annual earnings are forecast to grow slower than the American market. Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Service Corporation International, we've compiled three additional elements you should look at: Risks: You should be aware of the 2 warning signs for Service Corporation International we've uncovered before considering an investment in the company. Future Earnings: How does SCI'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 NYSE 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) 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.
Yahoo
15-06-2025
- Business
- Yahoo
IOI Corporation Berhad's (KLSE:IOICORP) Intrinsic Value Is Potentially 17% Below Its Share Price
IOI Corporation Berhad's estimated fair value is RM2.99 based on 2 Stage Free Cash Flow to Equity IOI Corporation Berhad's RM3.61 share price signals that it might be 21% overvalued The RM4.07 analyst price target for IOICORP is 36% more than our estimate of fair value Today we will run through one way of estimating the intrinsic value of IOI Corporation Berhad (KLSE:IOICORP) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (MYR, Millions) RM917.4m RM999.1m RM1.00b RM1.01b RM1.03b RM1.06b RM1.09b RM1.12b RM1.16b RM1.20b Growth Rate Estimate Source Analyst x2 Analyst x4 Analyst x4 Est @ 1.22% Est @ 1.95% Est @ 2.45% Est @ 2.81% Est @ 3.06% Est @ 3.23% Est @ 3.36% Present Value (MYR, Millions) Discounted @ 8.4% RM846 RM851 RM786 RM734 RM691 RM653 RM619 RM589 RM561 RM535 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM6.9b 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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.6%. We discount the terminal cash flows to today's value at a cost of equity of 8.4%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM1.2b× (1 + 3.6%) ÷ (8.4%– 3.6%) = RM26b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM26b÷ ( 1 + 8.4%)10= RM12b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is RM19b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of RM3.6, the company appears slightly overvalued at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. We would point out that 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 IOI Corporation Berhad 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 8.4%, which is based on a levered beta of 0.800. 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. Check out our latest analysis for IOI Corporation Berhad Strength Earnings growth over the past year exceeded the industry. Debt is not viewed as a risk. Weakness Dividend is low compared to the top 25% of dividend payers in the Food market. Expensive based on P/E ratio and estimated fair value. Opportunity IOICORP's financial characteristics indicate limited near-term opportunities for shareholders. Threat Dividends are not covered by cash flow. Annual earnings are forecast to decline for the next 3 years. Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a premium to intrinsic value? For IOI Corporation Berhad, we've put together three relevant factors you should assess: Risks: Every company has them, and we've spotted 2 warning signs for IOI Corporation Berhad (of which 1 is potentially serious!) you should know about. Future Earnings: How does IOICORP'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. Simply Wall St updates its DCF calculation for every Malaysian stock every day, so if you want to find the intrinsic value of any other stock just search 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
15-06-2025
- Business
- Yahoo
Downer EDI Limited (ASX:DOW) Shares Could Be 39% Below Their Intrinsic Value Estimate
Using the 2 Stage Free Cash Flow to Equity, Downer EDI fair value estimate is AU$10.16 Downer EDI's AU$6.23 share price signals that it might be 39% undervalued Our fair value estimate is 78% higher than Downer EDI's analyst price target of AU$5.70 Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Downer EDI Limited (ASX:DOW) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example! Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (A$, Millions) AU$332.1m AU$370.1m AU$379.3m AU$474.1m AU$327.0m AU$327.9m AU$331.4m AU$336.8m AU$343.6m AU$351.5m Growth Rate Estimate Source Analyst x3 Analyst x3 Analyst x3 Analyst x3 Analyst x1 Est @ 0.26% Est @ 1.07% Est @ 1.63% Est @ 2.03% Est @ 2.30% Present Value (A$, Millions) Discounted @ 7.2% AU$310 AU$322 AU$308 AU$360 AU$231 AU$217 AU$204 AU$194 AU$184 AU$176 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = AU$2.5b We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.9%) 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 7.2%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = AU$352m× (1 + 2.9%) ÷ (7.2%– 2.9%) = AU$8.6b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= AU$8.6b÷ ( 1 + 7.2%)10= AU$4.3b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is AU$6.8b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of AU$6.2, the company appears quite good value at a 39% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. 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 Downer EDI 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 7.2%, which is based on a levered beta of 0.972. 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 Downer EDI Strength Debt is not viewed as a risk. Weakness Dividend is low compared to the top 25% of dividend payers in the Commercial Services market. Opportunity Annual earnings are forecast to grow faster than the Australian market. Trading below our estimate of fair value by more than 20%. Threat Dividends are not covered by earnings. Annual revenue is forecast to grow slower than the Australian market. Valuation is only one side of the coin in terms of building your investment thesis, and 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?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Downer EDI, we've put together three essential factors you should further examine: Risks: For example, we've discovered 2 warning signs for Downer EDI that you should be aware of before investing here. Future Earnings: How does DOW'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 High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the ASX 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) 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
13-06-2025
- Business
- Yahoo
Is SAM Engineering & Equipment (M) Berhad (KLSE:SAM) Expensive For A Reason? A Look At Its Intrinsic Value
Using the 2 Stage Free Cash Flow to Equity, SAM Engineering & Equipment (M) Berhad fair value estimate is RM2.92 SAM Engineering & Equipment (M) Berhad is estimated to be 34% overvalued based on current share price of RM3.92 Our fair value estimate is 28% lower than SAM Engineering & Equipment (M) Berhad's analyst price target of RM4.04 Today we will run through one way of estimating the intrinsic value of SAM Engineering & Equipment (M) Berhad (KLSE:SAM) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early. 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 start off with, we need to estimate 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, so we discount the value of these future cash flows to their estimated value in today's dollars: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF (MYR, Millions) RM143.2m RM8.75m RM41.9m RM87.6m RM112.2m RM135.5m RM156.7m RM175.6m RM192.3m RM207.2m Growth Rate Estimate Source Analyst x2 Analyst x2 Analyst x2 Analyst x2 Est @ 28.11% Est @ 20.77% Est @ 15.63% Est @ 12.03% Est @ 9.51% Est @ 7.75% Present Value (MYR, Millions) Discounted @ 10% RM130 RM7.2 RM31.4 RM59.7 RM69.5 RM76.2 RM80.1 RM81.5 RM81.1 RM79.4 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = RM696m 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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 3.6%. We discount the terminal cash flows to today's value at a cost of equity of 10%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = RM207m× (1 + 3.6%) ÷ (10%– 3.6%) = RM3.3b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= RM3.3b÷ ( 1 + 10%)10= RM1.3b 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 RM2.0b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of RM3.9, the company appears potentially overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out. We would point out that 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 SAM Engineering & Equipment (M) Berhad 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 10%, which is based on a levered beta of 1.084. 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 SAM Engineering & Equipment (M) Berhad 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 Machinery market. Expensive based on P/E ratio and estimated fair value. Opportunity Annual earnings are forecast to grow faster than the Malaysian market. Threat Revenue is forecast to grow slower than 20% per year. Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value lower than the current share price? For SAM Engineering & Equipment (M) Berhad, we've compiled three relevant aspects you should explore: Financial Health: Does SAM have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk. Future Earnings: How does SAM'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. Simply Wall St updates its DCF calculation for every Malaysian stock every day, so if you want to find the intrinsic value of any other stock just search 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.
Yahoo
13-06-2025
- Business
- Yahoo
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) 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.
