Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Kinross Gold Corporation (TSX:K) as an investment opportunity. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after June 2018 then I highly recommend you check out the latest calculation for Kinross Gold here.
What’s the value?
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. To start off, I pulled together the analyst consensus estimates of K’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 17.66%. This resulted in a present value of 5-year cash flow of US$900.04M. Want to know how I calculated this value? Take a look at our detailed analysis here.
The graph above shows how K’s earnings are expected to move going forward, which should give you some color on K’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 stable 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 US$2.21B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$3.11B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of CA$3.22, which, compared to the current share price of CA$4.64, we see that Kinross Gold is quite expensive and not available at a discount at this time.
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 K, I’ve compiled three relevant factors you should look at:
- Financial Health: Does K 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 K’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 K? 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 CA 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.