Estimating The Fair Value Of TimkenSteel Corporation (NYSE:TMST)
How far off is TimkenSteel Corporation (NYSE:TMST) 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. Anyone interested in learning a bit more about intrinsic value should have a read of 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 TimkenSteel here.
What’s the value?
I’ve used the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Firstly, I took the analyst consensus forecast of TMST’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 12.04%. 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 US$278.92M. Keen to know how I calculated this value? Read our detailed analysis here.
The graph above shows how TMST’s top and bottom lines are expected to move going forward, which should give you some color on TMST’s outlook. Secondly, I determine 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 perpetual 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 US$512.33M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$791.24M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $17.77, which, compared to the current share price of $19.01, we find that TimkenSteel is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For TMST, I’ve put together three essential factors you should further examine:
Financial Health: Does TMST 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 TMST’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 TMST? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.
