Does the share price for GTT Communications Inc (NYSE:GTT) 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 March 2018 then I highly recommend you check out the latest calculation for GTT Communications here.
Crunching the numbers
I will be using the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I took the analyst consensus forecast of GTT’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 14.21%. This resulted in a present value of 5-year cash flow of US$728.33M. Want to know how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how GTT’s earnings are expected to move in the future, which should give you some color on GTT’s outlook. Secondly, I 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 steady growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is US$1.64B.
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 US$2.37B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $52.78, which, compared to the current share price of $60.95, we see that GTT Communications is fair value, maybe slightly overvalued at the time of writing.
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 GTT, I’ve put together three essential factors you should look at:
- Financial Health: Does GTT 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 GTT’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 GTT? 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 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.