Metso Corporation (HEL:METSO) Investors Are Paying Above The Intrinsic Value
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Metso Corporation (HLSE:METSO) 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 March 2018 then I highly recommend you check out the latest calculation for Metso here.
Is METSO fairly valued?
I use what is known as the 2-stage 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. To begin, I took the analyst consensus forecast of METSO’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.15%. This resulted in a present value of 5-year cash flow of €828.64M. Want to understand how I arrived at this number? Read our detailed analysis here.
Above is a visual representation of how METSO’s earnings are expected to move going forward, which should give you some color on METSO’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the perpetual 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 €2.19B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €3.02B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of €20.14, which, compared to the current share price of €26.19, we see that Metso is quite expensive at the time of writing.
Next Steps:
Although the valuation of a company is important, 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 METSO, I’ve put together three relevant factors you should look at:
Financial Health: Does METSO 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 METSO’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 METSO? 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 HLSE 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.
