In this article I am going to calculate the intrinsic value of Cabot Corporation (NYSE:CBT) using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after December 2017 then I highly recommend you check out the latest calculation for Cabot here.
Is CBT fairly valued?
I will be using the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I use the analyst consensus forecast of CBT’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 9.38%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $763.0M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
The infographic above illustrates how CBT’s top and bottom lines are expected to move going forward, which should give you some color on CBT’s outlook. Now we need to calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is $1,860.0M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $2,622.9M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $42.34, which, compared to the current share price of $58.47, we find that Cabot is quite expensive and not available at a discount at this time.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For CBT, I’ve compiled three essential aspects you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.