Does the share price for Hudbay Minerals Inc (TSX:HBM) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. 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 January 2018 so be sure check the latest calculation for Hudbay Minerals here.
Crunching the numbers
I use what is known as the 2-stage 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 start off, I pulled together the analyst consensus forecast of HBM’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 17.87%. This resulted in a present value of 5-year cash flow of $764.8M. Keen to know how I arrived at this number? Read our detailed analysis here.
The infographic above illustrates how HBM’s earnings are expected to move going forward, which should give you some color on HBM’s outlook. Now we need to determine the terminal value, which accounts for all the future cash flows after the five years. 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. Discounting the terminal value back five years gives us a present value of $1,009.6M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $1,774.4M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of CA$8.50, which, compared to the current share price of CA$11.48, we see that Hudbay Minerals is quite expensive and not available at a discount at this time.
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. What is the reason for the share price to differ from the intrinsic value? For HBM, there are three relevant aspects you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the TSX 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.