Does the share price for Infrastrutture Wireless Italiane Sp.A. (BIT:INW) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. 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 after May 2018 then I highly recommend you check out the latest calculation for Infrastrutture Wireless Italiane here.
Crunching the numbers
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. Firstly, I use the analyst consensus forecast of INW’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.4%. This resulted in a present value of 5-year cash flow of €495.19M. Keen to understand how I calculated this value? Read our detailed analysis here.
The infographic above illustrates how INW’s top and bottom lines are expected to move going forward, which should give you some color on INW’s outlook. Next, I determine the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual 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 €2.28B.
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 €2.77B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of €4.62, which, compared to the current share price of €6.805, we see that Infrastrutture Wireless Italiane is quite expensive at the time of writing.
Although the valuation of a company is important, 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 INW, there are three pertinent factors you should look at:
- Financial Health: Does INW 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 INW’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 INW? 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 BIT 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.