How far off is Hyster-Yale Materials Handling Inc (NYSE:HY) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in December 2017 so be sure check the latest calculation for Hyster-Yale Materials Handling here.
What’s the value?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. Firstly, I took the analyst consensus forecast of HY’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 9.84%. 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 $385.9M. Keen to know how I calculated this value? Check out our detailed analysis here.
The infographic above illustrates how HY’s top and bottom lines are expected to move going forward, which should give you an idea of HY’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 $730.1M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $1,116.0M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $67.79, which, compared to the current share price of $84.59, we see that Hyster-Yale Materials Handling is fair value, maybe slightly overvalued 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 HY, there are three important factors you should look at:
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.