Estimating The Intrinsic Value Of Williams Partners LP (NYSE:WPZ)
In this article I am going to calculate the intrinsic value of Williams Partners LP (NYSE:WPZ) 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 January 2018 then I highly recommend you check out the latest calculation for Williams Partners here.
Is WPZ fairly valued?
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 begin, I pulled together the analyst consensus forecast of WPZ’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 10.03%. 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 $12,148.3M. Want to understand how I arrived at this number? Take a look at our detailed analysis here.
In the visual above, we see how how WPZ’s top and bottom lines are expected to move in the future, which should give you some color on WPZ’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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. After discounting the terminal value back five years, the present value becomes $32,687.4M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $44,835.7M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $46.04, which, compared to the current share price of $41.3, we find that Williams Partners is about right, perhaps slightly undervalued at a 10.30% 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 WPZ, I’ve compiled three essential factors you should look at:
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.
