An Intrinsic Calculation For Bombardier Inc (TSE:BBD.B) Shows It’s 49% Undervalued
I am going to run you through how I calculated the intrinsic value of Bombardier Inc (TSX:BBD.B) 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 June 2018 so be sure check the latest calculation for Bombardier 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 begin, I use the analyst consensus forecast of BBD.B’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.47%. This resulted in a present value of 5-year cash flow of US$2.87B. Want to understand how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how BBD.B’s earnings are expected to move going forward, which should give you an idea of BBD.B’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. 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. The present value of the terminal value after discounting it back five years is US$15.15B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$18.02B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of CA$10.12, which, compared to the current share price of CA$5.17, we find that Bombardier is quite good value at a 48.93% discount to what it is available for right now.
Next Steps:
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 BBD.B, I’ve compiled three essential factors you should further research:
Financial Health: Does BBD.B 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 BBD.B’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 BBD.B? 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 CA 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.
