I am going to run you through how I calculated the intrinsic value of NEUCA SA (WSE:NEU) 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. Also note that this article was written in March 2018 so be sure check the latest calculation for NEUCA here.
What’s the value?
I will be 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 perpetual stable growth rate. To start off, I took the analyst consensus estimates of NEU’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.35%. 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 ZŁ284.43M. Want to know how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how NEU’s top and bottom lines are expected to move in the future, which should give you some color on NEU’s outlook. Next, I determine 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. Discounting the terminal value back five years gives us a present value of ZŁ1.00B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is ZŁ1.29B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of PLN281.82, which, compared to the current share price of PLN255.5, we see that NEUCA is about right, perhaps slightly undervalued at a 9.34% 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 NEU, there are three essential factors you should further examine:
- Financial Health: Does NEU 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 NEU’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 NEU? 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 WSE 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.