Estimating The Intrinsic Value Of Bucher Industries AG (VTX:BUCN)

editorial-team@simplywallst.com (Simply Wall St)
6 min read
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In this article:

Key Insights

  • Bucher Industries' estimated fair value is CHF396 based on 2 Stage Free Cash Flow to Equity

  • Bucher Industries' CHF354 share price indicates it is trading at similar levels as its fair value estimate

  • Analyst price target for BUCN is CHF397 which is similar to our fair value estimate

How far off is Bucher Industries AG (VTX:BUCN) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Bucher Industries

The Method

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. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF (CHF, Millions)

CHF363.5m

CHF257.3m

CHF235.0m

CHF221.3m

CHF212.4m

CHF206.4m

CHF202.4m

CHF199.7m

CHF197.8m

CHF196.6m

Growth Rate Estimate Source

Analyst x4

Analyst x3

Analyst x1

Est @ -5.82%

Est @ -4.05%

Est @ -2.81%

Est @ -1.94%

Est @ -1.34%

Est @ -0.91%

Est @ -0.61%

Present Value (CHF, Millions) Discounted @ 5.3%

CHF345

CHF232

CHF201

CHF180

CHF164

CHF152

CHF141

CHF132

CHF125

CHF118

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CHF1.8b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.08%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 5.3%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CHF197m× (1 + 0.08%) ÷ (5.3%– 0.08%) = CHF3.8b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CHF3.8b÷ ( 1 + 5.3%)10= CHF2.3b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF4.1b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CHF354, the company appears about fair value at a 10% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
SWX:BUCN Discounted Cash Flow January 22nd 2024

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Bucher Industries as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 5.3%, which is based on a levered beta of 1.040. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Bucher Industries

Strength

  • Earnings growth over the past year exceeded the industry.

  • Debt is not viewed as a risk.

  • Dividends are covered by earnings and cash flows.

Weakness

  • Dividend is low compared to the top 25% of dividend payers in the Machinery market.

Opportunity

  • Good value based on P/E ratio and estimated fair value.

Threat

  • Annual earnings are forecast to decline for the next 4 years.

Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Bucher Industries, we've put together three additional aspects you should consider:

  1. Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Bucher Industries , and understanding it should be part of your investment process.

  2. Future Earnings: How does BUCN'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.

  3. Other High Quality Alternatives: Do you like a good all-rounder? 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 updates its DCF calculation for every Swiss stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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