In this article I am going to calculate the intrinsic value of Carpenter Technology Corporation (NYSE:CRS) 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 February 2018 then I highly recommend you check out the latest calculation for Carpenter Technology here.
Is CRS fairly valued?
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, I pulled together the analyst consensus estimates of CRS’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 11.28%. This resulted in a present value of 5-year cash flow of $629.1M. Want to know how I arrived at this number? Check out our detailed analysis here.
The infographic above illustrates how CRS’s earnings are expected to move going forward, which should give you some color on CRS’s outlook. Secondly, I determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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 $1,165.7M.
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 $1,794.8M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $38.34, which, compared to the current share price of $51.87, we find that Carpenter Technology is quite expensive and not available at a discount at this time.
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. What is the reason for the share price to differ from the intrinsic value? For CRS, there are three key aspects you should further examine:
- 1. Financial Health: Does CRS 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.
- 2. Future Earnings: How does CRS’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.
- 2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of CRS? 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 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.