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Yahoo
a day ago
- Business
- Yahoo
Aurubis AG's (ETR:NDA) Intrinsic Value Is Potentially 80% Above Its Share Price
Explore Aurubis's Fair Values from the Community and select yours Key Insights Aurubis' estimated fair value is €172 based on 2 Stage Free Cash Flow to Equity Current share price of €95.70 suggests Aurubis is potentially 44% undervalued Our fair value estimate is 117% higher than Aurubis' analyst price target of €79.38 Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Aurubis AG (ETR:NDA) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. 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. 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. Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit. The Calculation We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. 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 discount the value of these future cash flows to their estimated value in today's dollars: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (€, Millions) -€127.8m €203.6m €241.2m €273.4m €300.1m €321.8m €339.5m €353.9m €366.0m €376.2m Growth Rate Estimate Source Analyst x4 Analyst x3 Est @ 18.46% Est @ 13.34% Est @ 9.75% Est @ 7.25% Est @ 5.49% Est @ 4.26% Est @ 3.40% Est @ 2.80% Present Value (€, Millions) Discounted @ 5.4% -€121 €183 €206 €222 €231 €235 €235 €233 €228 €223 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = €1.9b We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 1.4%. We discount the terminal cash flows to today's value at a cost of equity of 5.4%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = €376m× (1 + 1.4%) ÷ (5.4%– 1.4%) = €9.5b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €9.5b÷ ( 1 + 5.4%)10= €5.6b 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 €7.5b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of €95.7, the company appears quite undervalued at a 44% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out. Important Assumptions The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Aurubis 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 5.4%, which is based on a levered beta of 0.949. 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 Aurubis SWOT Analysis for Aurubis 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 Metals and Mining market. Opportunity Good value based on P/E ratio and estimated fair value. Threat Paying a dividend but company has no free cash flows. Annual earnings are forecast to decline for the next 3 years. Looking Ahead: Although the valuation of a company is important, 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. 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. Can we work out why the company is trading at a discount to intrinsic value? For Aurubis, we've compiled three further factors you should further research: Risks: For example, we've discovered 2 warning signs for Aurubis (1 is potentially serious!) that you should be aware of before investing here. Future Earnings: How does NDA'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 German 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
31-07-2025
- Business
- Yahoo
Frasers Property Limited's (SGX:TQ5) Intrinsic Value Is Potentially 100% Above Its Share Price
Key Insights Frasers Property's estimated fair value is S$1.90 based on 2 Stage Free Cash Flow to Equity Frasers Property is estimated to be 50% undervalued based on current share price of S$0.95 Today we will run through one way of estimating the intrinsic value of Frasers Property Limited (SGX:TQ5) by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple! 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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. 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. The Model 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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (SGD, Millions) S$146.2m S$949.0m S$858.3m S$806.9m S$778.8m S$765.3m S$761.5m S$764.2m S$771.5m S$782.2m Growth Rate Estimate Source Analyst x2 Analyst x1 Est @ -9.56% Est @ -5.98% Est @ -3.48% Est @ -1.73% Est @ -0.50% Est @ 0.36% Est @ 0.96% Est @ 1.38% Present Value (SGD, Millions) Discounted @ 11% S$132 S$770 S$627 S$531 S$462 S$409 S$366 S$331 S$301 S$275 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = S$4.2b 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 (2.4%) 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 11%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = S$782m× (1 + 2.4%) ÷ (11%– 2.4%) = S$9.2b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= S$9.2b÷ ( 1 + 11%)10= S$3.3b The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is S$7.5b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of S$0.9, the company appears quite good value at a 50% 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. Important Assumptions The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Frasers Property 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 11%, which is based on a levered beta of 2.000. 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. See our latest analysis for Frasers Property SWOT Analysis for Frasers Property Strength Dividends are covered by earnings and cash flows. Weakness Interest payments on debt are not well covered. Dividend is low compared to the top 25% of dividend payers in the Real Estate market. Opportunity Trading below our estimate of fair value by more than 20%. Threat Debt is not well covered by operating cash flow. Next Steps: Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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. Why is the intrinsic value higher than the current share price? For Frasers Property, we've compiled three pertinent elements you should further examine: Risks: Be aware that Frasers Property is showing 4 warning signs in our investment analysis , and 2 of those shouldn't be ignored... Future Earnings: How does TQ5'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 SGX 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. Sign in to access your portfolio
Yahoo
26-07-2025
- Business
- Yahoo
Is There An Opportunity With IQVIA Holdings Inc.'s (NYSE:IQV) 39% Undervaluation?
Key Insights Using the 2 Stage Free Cash Flow to Equity, IQVIA Holdings fair value estimate is US$325 IQVIA Holdings' US$199 share price signals that it might be 39% undervalued Our fair value estimate is 56% higher than IQVIA Holdings' analyst price target of US$208 Today we will run through one way of estimating the intrinsic value of IQVIA Holdings Inc. (NYSE:IQV) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex. We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. Step By Step Through The Calculation We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF ($, Millions) US$2.11b US$2.27b US$2.44b US$2.69b US$2.87b US$3.02b US$3.17b US$3.30b US$3.42b US$3.55b Growth Rate Estimate Source Analyst x6 Analyst x4 Analyst x2 Analyst x2 Est @ 6.55% Est @ 5.46% Est @ 4.71% Est @ 4.18% Est @ 3.81% Est @ 3.55% Present Value ($, Millions) Discounted @ 7.7% US$2.0k US$2.0k US$2.0k US$2.0k US$2.0k US$1.9k US$1.9k US$1.8k US$1.8k US$1.7k ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$19b The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.7%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$3.5b× (1 + 2.9%) ÷ (7.7%– 2.9%) = US$76b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$76b÷ ( 1 + 7.7%)10= US$36b 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 US$55b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$199, 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. The Assumptions 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 IQVIA Holdings 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 7.7%, which is based on a levered beta of 1.104. 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 IQVIA Holdings SWOT Analysis for IQVIA Holdings Strength Debt is well covered by earnings. Weakness Earnings declined over the past year. Opportunity Annual earnings are forecast to grow for the next 3 years. Trading below our estimate of fair value by more than 20%. Threat Debt is not well covered by operating cash flow. Annual earnings are forecast to grow slower than the American market. Moving On: Whilst important, the DCF calculation 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For IQVIA Holdings, we've compiled three essential elements you should consider: Risks: As an example, we've found 1 warning sign for IQVIA Holdings that you need to consider before investing here. Future Earnings: How does IQV'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
26-07-2025
- Business
- Yahoo
Estimating The Intrinsic Value Of adesso SE (ETR:ADN1)
Key Insights Using the 2 Stage Free Cash Flow to Equity, adesso fair value estimate is €97.33 With €87.10 share price, adesso appears to be trading close to its estimated fair value The €128 analyst price target for ADN1 is 31% more than our estimate of fair value Does the July share price for adesso SE (ETR:ADN1) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. There's really not all that much to it, even though it might appear quite complex. 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. Trump has pledged to "unleash" American oil and gas and these 15 US stocks have developments that are poised to benefit. Step By Step Through The Calculation 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 need to discount the sum of these future cash flows to arrive at a present value estimate: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (€, Millions) €26.5m €45.5m €45.5m €45.8m €46.1m €46.5m €47.0m €47.5m €48.0m €48.6m Growth Rate Estimate Source Analyst x1 Analyst x2 Est @ 0.17% Est @ 0.50% Est @ 0.73% Est @ 0.89% Est @ 1.01% Est @ 1.08% Est @ 1.14% Est @ 1.18% Present Value (€, Millions) Discounted @ 8.1% €24.5 €38.9 €36.0 €33.5 €31.2 €29.1 €27.2 €25.5 €23.8 €22.3 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = €292m We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 1.3%. We discount the terminal cash flows to today's value at a cost of equity of 8.1%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = €49m× (1 + 1.3%) ÷ (8.1%– 1.3%) = €721m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €721m÷ ( 1 + 8.1%)10= €331m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €623m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of €87.1, the company appears about fair value at a 11% 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. Important Assumptions Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 adesso 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 8.1%, which is based on a levered beta of 1.577. 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 adesso SWOT Analysis for adesso Strength Debt is well covered by cash flow. Dividends are covered by earnings and cash flows. Weakness Interest payments on debt are not well covered. Dividend is low compared to the top 25% of dividend payers in the IT market. Opportunity Annual earnings are forecast to grow faster than the German market. Current share price is below our estimate of fair value. Threat Revenue is forecast to grow slower than 20% per year. Looking Ahead: Although the valuation of a company is important, it 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 adesso, there are three relevant aspects you should further research: Risks: To that end, you should be aware of the 1 warning sign we've spotted with adesso . Future Earnings: How does ADN1'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 XTRA 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
11-05-2025
- Business
- Yahoo
Is There An Opportunity With American Eagle Outfitters, Inc.'s (NYSE:AEO) 49% Undervaluation?
American Eagle Outfitters' estimated fair value is US$22.03 based on 2 Stage Free Cash Flow to Equity American Eagle Outfitters' US$11.14 share price signals that it might be 49% undervalued Analyst price target for AEO is US$12.60 which is 43% below our fair value estimate How far off is American Eagle Outfitters, Inc. (NYSE:AEO) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions) US$289.3m US$271.1m US$301.0m US$291.6m US$287.6m US$287.3m US$289.4m US$293.3m US$298.4m US$304.6m Growth Rate Estimate Source Analyst x3 Analyst x3 Analyst x2 Est @ -3.12% Est @ -1.36% Est @ -0.12% Est @ 0.74% Est @ 1.34% Est @ 1.76% Est @ 2.06% Present Value ($, Millions) Discounted @ 9.3% US$265 US$227 US$230 US$204 US$184 US$168 US$155 US$144 US$134 US$125 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$1.8b 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. 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 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 9.3%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$305m× (1 + 2.8%) ÷ (9.3%– 2.8%) = US$4.8b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$4.8b÷ ( 1 + 9.3%)10= US$2.0b 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$3.8b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$11.1, the company appears quite good value 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. 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 American Eagle Outfitters 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 9.3%, which is based on a levered beta of 1.513. 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. See our latest analysis for American Eagle Outfitters Strength Earnings growth over the past year exceeded the industry. Currently debt free. Dividends are covered by earnings and cash flows. Weakness Dividend is low compared to the top 25% of dividend payers in the Specialty Retail market. Opportunity Good value based on P/E ratio and estimated fair value. Threat Annual earnings are forecast to decline for the next 2 years. Whilst important, the DCF calculation 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. 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. 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. Can we work out why the company is trading at a discount to intrinsic value? For American Eagle Outfitters, we've compiled three important elements you should assess: Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with American Eagle Outfitters (at least 1 which doesn't sit too well with us) , and understanding them should be part of your investment process. Future Earnings: How does AEO'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. Simply Wall St updates its DCF calculation for every American 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.
