I am going to run you through how I calculated the intrinsic value of HOCHTIEF Aktiengesellschaft (DB:HOT) using the discounted cash flow (DCF) method. 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 May 2018 then I highly recommend you check out the latest calculation for HOCHTIEF here.
What’s the value?
I’ve used 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 perpetual stable growth rate. To begin, I pulled together the analyst consensus forecast of HOT’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.13%. This resulted in a present value of 5-year cash flow of €3.63B. Want to know how I arrived at this number? Check out our detailed analysis here.
The infographic above illustrates how HOT’s earnings are expected to move going forward, which should give you some color on HOT’s outlook. Then, I calculate the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the steady 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 €7.37B.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is €11.00B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of €171.22, which, compared to the current share price of €150.4, we see that HOCHTIEF is about right, perhaps slightly undervalued at a 12.16% discount to what it is available for right now.
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.
For HOT, I’ve put together three relevant aspects you should further research:
- Financial Health: Does HOT 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 HOT’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: Are there other high quality stocks you could be holding instead of HOT? 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 for every stock on the DB 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.