Intrinsic Calculation For Ströer SE & Co KGaA (FRA:SAX) Shows Investors Are Overpaying
I am going to run you through how I calculated the intrinsic value of Ströer SE & Co KGaA (DB:SAX) 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 Ströer SE KGaA here.
Is SAX fairly valued?
We are going to use a two-stage DCF 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 estimates of SAX’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 11.89%. 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 €868.43M. Keen to understand how I arrived at this number? Take a look at our detailed analysis here.
Above is a visual representation of how SAX’s earnings are expected to move in the future, which should give you some color on SAX’s outlook. Now we need to calculate 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. The present value of the terminal value after discounting it back five years is €1.58B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €2.45B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of €44.12, which, compared to the current share price of €56.1, we see that Ströer SE KGaA is fair value, maybe slightly overvalued at the time of writing.
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 SAX, I’ve put together three key aspects you should further research:
Financial Health: Does SAX 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 SAX’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 SAX? 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 DE 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.
