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# A Look At The Fair Value Of AutoCanada Inc (TSE:ACQ)

Does the share price for AutoCanada Inc (TSE:ACQ) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! 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 and its not August 2018 then I highly recommend you check out the latest calculation for AutoCanada by following the link below.

### The calculation

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

#### 5-year cash flow forecast

 2018 2019 2020 2021 2022 Levered FCF (CA\$, Millions) CA\$38.46 CA\$53.75 CA\$62.90 CA\$73.59 CA\$85.37 Source Analyst x3 Analyst x5 Est @ 17.03% Est @ 17%, capped from 17.03% Est @ 16%, capped from 17.03% Present Value Discounted @ 16.7% CA\$32.96 CA\$39.47 CA\$39.58 CA\$39.68 CA\$39.44

Present Value of 5-year Cash Flow (PVCF)= CA\$191.13m

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.3%. We discount this to today’s value at a cost of equity of 16.7%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CA\$85.37m × (1 + 2.3%) ÷ (16.7% – 2.3%) = CA\$608.50m

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CA\$608.50m ÷ ( 1 + 16.7%)5 = CA\$281.15m

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CA\$472.29m. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of CA\$17.24. Relative to the current share price of CA\$14.71, the stock is about right, perhaps slightly undervalued at a 14.69% discount to what it is available for right now.

### Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at AutoCanada as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 16.7%, which is based on a levered beta of 1.874. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

### 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. For ACQ, I’ve put together three essential factors you should further research:

1. Financial Health: Does ACQ 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 ACQ’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.
3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ACQ? 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 TSE every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.