A Look At The Fair Value Of DS Smith Plc (LON:SMDS)
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of DS Smith Plc (LSE:SMDS) as an investment opportunity. 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. Also note that this article was written in March 2018 so be sure check the latest calculation for DS Smith here.
What’s the value?
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 begin, I use the analyst consensus forecast of SMDS’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.3%. 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 UK£1.53B. Keen to understand how I calculated this value? Read our detailed analysis here.
The graph above shows how SMDS’s earnings are expected to move in the future, which should give you some color on SMDS’s outlook. Secondly, I calculate the terminal value, which accounts for all the future cash flows after the five years. I’ve decided 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. Discounting the terminal value back five years gives us a present value of UK£4.44B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is UK£5.97B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £5.57, which, compared to the current share price of £5, we see that DS Smith is about right, perhaps slightly undervalued at a 10.20% 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.
For SMDS, I’ve put together three essential factors you should further research:
Financial Health: Does SMDS 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 SMDS’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 SMDS? 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 LSE 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.
