I am going to run you through how I calculated the intrinsic value of Harris Corporation (NYSE:HRS) 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. If you are reading this after January 2018 then I highly recommend you check out the latest calculation for Harris here.
Crunching the numbers
I use what is known as the 2-stage 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. Firstly, I use the analyst consensus forecast of HRS’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.69%. 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 $3,885.1M. Keen to know how I arrived at this number? Check out our detailed analysis here.
The infographic above illustrates how HRS’s top and bottom lines are expected to move going forward, which should give you an idea of HRS’s outlook. Next, I calculate the terminal value, which accounts for all the future cash flows after the five years. 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 $11,800.8M.
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 $15,685.9M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $131.59, which, compared to the current share price of $142.07, we see that Harris is fair value, maybe slightly overvalued at the time of writing.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For HRS, I’ve put together three relevant factors you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE 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.