Investors Are Undervaluing Mitel Networks Corporation (NASDAQ:MITL) By 33.79%, Here Is My Intrinsic Value Calculation
Does the share price for Mitel Networks Corporation (NASDAQ:MITL) 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. Also note that this article was written in February 2018 so be sure check the latest calculation for Mitel Networks here.
Crunching the numbers
We are going to use a two-stage DCF 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. Firstly, I took the analyst consensus estimates of MITL’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 12.8%. 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 $548.8M. Keen to know how I arrived at this number? Read our detailed analysis here.
The infographic above illustrates how MITL’s earnings are expected to move going forward, which should give you some color on MITL’s outlook. Secondly, I calculate 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. Discounting the terminal value back five years gives us a present value of $1,123.7M.
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 $1,672.5M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $13.92, which, compared to the current share price of $9.22, we find that Mitel Networks is quite undervalued at a 33.79% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and 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 MITL, I’ve put together three key factors you should look at:
1. Financial Health: Does MITL 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 MITL’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 MITL? 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 US 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.
