In this article I am going to calculate the intrinsic value of General Electric Company (NYSE:GE) 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. Also note that this article was written in May 2018 so be sure check the latest calculation for General Electric here.
Crunching the numbers
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. To start off, I pulled together the analyst consensus forecast of GE’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 11.91%. This resulted in a present value of 5-year cash flow of US$32.70B. Keen to know how I arrived at this number? Read our detailed analysis here.
The graph above shows how GE’s top and bottom lines are expected to move going forward, which should give you some color on GE’s outlook. Next, I calculate 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 stable 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 US$69.74B.
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$102.44B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $11.79, which, compared to the current share price of $14.63, we find that General Electric is fair value, maybe slightly overvalued at the time of writing.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For GE, I’ve compiled three key factors you should further research:
- Financial Health: Does GE 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 GE’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 GE? 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 NYSE 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.