Investors In AK Steel Holding Corporation (NYSE:AKS) Are Paying Above The Intrinsic Value
Does the share price for AK Steel Holding Corporation (NYSE:AKS) 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 February 2018 so be sure check the latest calculation for AK Steel Holding here.
Is AKS fairly valued?
I use what is known as the 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To start off, I use the analyst consensus estimates of AKS’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 15.99%. 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 $681.4M. Keen to know how I arrived at this number? Take a look at our detailed analysis here.
Above is a visual representation of how AKS’s earnings are expected to move in the future, which should give you an idea of AKS’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. After discounting the terminal value back five years, the present value becomes $630.2M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $1,311.6M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $4.17, which, compared to the current share price of $5.18, we see that AK Steel Holding is fair value, maybe slightly overvalued and not available at a discount at this time.
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 AKS, I’ve put together three important aspects you should further examine:
1. Financial Health: Does AKS 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.
2. Future Earnings: How does AKS’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.
2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of AKS? 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.
