J Sainsbury plc (LON:SBRY) Is Trading At A 30.56% Discount To Its Intrinsic Value
Does the share price for J Sainsbury plc (LSE:SBRY) 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. If you are reading this after December 2017 then I highly recommend you check out the latest calculation for Jinsbury here.
Is SBRY fairly valued?
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 start off, I took the analyst consensus estimates of SBRY’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.3%. This resulted in a present value of 5-year cash flow of £2,024.2M. Keen to know how I arrived at this number? Take a look at our detailed analysis here.
The infographic above illustrates how SBRY’s earnings are expected to move in the future, which should give you some color on SBRY’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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. After discounting the terminal value back five years, the present value becomes £5,423.8M.
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 £7,447.9M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £3.41, which, compared to the current share price of £2.366, we find that Jinsbury is quite undervalued at a 30.56% 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 SBRY, I’ve compiled three pertinent factors you should look at:
PS. Simply Wall St does a DCF calculation for every GB 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.
