U.S. markets close in 3 hours 18 minutes
  • S&P 500

    4,245.15
    -1.29 (-0.03%)
     
  • Dow 30

    33,893.06
    -52.52 (-0.15%)
     
  • Nasdaq

    14,254.76
    +1.49 (+0.01%)
     
  • Russell 2000

    2,307.10
    +11.16 (+0.49%)
     
  • Crude Oil

    73.61
    +0.76 (+1.04%)
     
  • Gold

    1,786.20
    +8.80 (+0.50%)
     
  • Silver

    26.17
    +0.31 (+1.19%)
     
  • EUR/USD

    1.1939
    -0.0004 (-0.04%)
     
  • 10-Yr Bond

    1.4870
    +0.0150 (+1.02%)
     
  • GBP/USD

    1.3965
    +0.0018 (+0.13%)
     
  • USD/JPY

    110.9330
    +0.2980 (+0.27%)
     
  • BTC-USD

    33,638.61
    +1,669.91 (+5.22%)
     
  • CMC Crypto 200

    810.31
    +0.12 (+0.01%)
     
  • FTSE 100

    7,074.06
    -15.95 (-0.22%)
     
  • Nikkei 225

    28,874.89
    -9.24 (-0.03%)
     

Is There An Opportunity With Ball Corporation's (NYSE:BLL) 35% Undervaluation?

  • Oops!
    Something went wrong.
    Please try again later.
·6 min read
  • Oops!
    Something went wrong.
    Please try again later.

Does the January share price for Ball Corporation (NYSE:BLL) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Ball

The method

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$473.5m

US$637.6m

US$1.12b

US$1.41b

US$1.79b

US$2.07b

US$2.31b

US$2.51b

US$2.68b

US$2.82b

Growth Rate Estimate Source

Analyst x7

Analyst x5

Analyst x1

Analyst x1

Analyst x1

Est @ 15.76%

Est @ 11.65%

Est @ 8.76%

Est @ 6.75%

Est @ 5.34%

Present Value ($, Millions) Discounted @ 6.6%

US$444

US$561

US$920

US$1.1k

US$1.3k

US$1.4k

US$1.5k

US$1.5k

US$1.5k

US$1.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$12b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.6%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$2.8b× (1 + 2.0%) ÷ (6.6%– 2.0%) = US$63b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$63b÷ ( 1 + 6.6%)10= US$33b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$45b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$88.3, the company appears quite good value at a 35% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
dcf

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 these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Ball as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.6%, which is based on a levered beta of 0.881. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally 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. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For Ball, we've compiled three relevant items you should consider:

  1. Risks: For example, we've discovered 3 warning signs for Ball (1 is concerning!) that you should be aware of before investing here.

  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for BLL's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

  3. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.