Estimating The Fair Value Of Canadian Tire Corporation Limited (TSE:CTC.A)
How far off is Canadian Tire Corporation Limited (TSX:CTC.A) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced 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 March 2018 then I highly recommend you check out the latest calculation for Canadian Tire here.
Crunching the numbers
I use what is known as the 2-stage 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 start off, I took the analyst consensus forecast of CTC.A’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.68%. 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 CA$3.29B. Want to understand how I calculated this value? Check out our detailed analysis here.
The graph above shows how CTC.A’s earnings are expected to move in the future, which should give you some color on CTC.A’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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. After discounting the terminal value back five years, the present value becomes CA$8.97B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CA$12.26B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of CA$185.03, which, compared to the current share price of CA$172.57, we find that Canadian Tire is about right, perhaps slightly undervalued at a 6.73% discount to what it is available for right now.
Next Steps:
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 CTC.A, I’ve compiled three pertinent factors you should look at:
Financial Health: Does CTC.A 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 CTC.A’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 CTC.A? 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 TSX 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.
