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Estimating The Intrinsic Value Of WABCO Holdings Inc (NYSE:WBC)

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of WABCO Holdings Inc (NYSE:WBC) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. This is done using the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. 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 and its not June 2018 then I highly recommend you check out the latest calculation for WABCO Holdings by following the link below. See our latest analysis for WABCO Holdings

The calculation

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 begin with we have to get estimates of the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

2018

2019

2020

2021

2022

Levered FCF ($, Millions)

$347.10

$381.08

$396.26

$412.04

$428.44

Source

Analyst x4

Analyst x5

Extrapolated @ (3.98%)

Extrapolated @ (3.98%)

Extrapolated @ (3.98%)

Present Value Discounted @ 9.98%

$315.61

$315.07

$297.89

$281.65

$266.30

Present Value of 5-year Cash Flow (PVCF)= US$1.48b

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 10%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$428.44m × (1 + 2.9%) ÷ (10% – 2.9%) = US$6.28b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$6.28b ÷ ( 1 + 10%)5 = US$3.90b

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 US$5.38b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of $100.33. Relative to the current share price of $120.19, the stock is fair value, maybe slightly overvalued at the time of writing.

NYSE:WBC Intrinsic Value June 22nd 18
NYSE:WBC Intrinsic Value June 22nd 18

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at WABCO Holdings as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 10%, which is based on a levered beta of 0.997. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

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 WBC, there are three important factors you should further research:

  1. Financial Health: Does WBC 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 WBC’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: Are there other high quality stocks you could be holding instead of WBC? 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.

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