Is There An Opportunity With Hochschild Mining PLC’s (LON:HOC) 23.65% Undervaluation?
In this article I am going to calculate the intrinsic value of Hochschild Mining PLC (LSE:HOC) using the discounted cash flows (DCF) model. 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 February 2018 then I highly recommend you check out the latest calculation for Hochschild Mining here.
Crunching the numbers
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 estimates of HOC’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 10.77%. 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 US$689.42M. Want to know how I arrived at this number? Check out our detailed analysis here.
Above is a visual representation of how HOC’s earnings are expected to move going forward, which should give you some color on HOC’s outlook. Then, I calculate the terminal value, which is the business’s cash flow after the first stage. 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 US$1.30B.
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$1.99B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £2.81, which, compared to the current share price of £2.148, we find that Hochschild Mining is about right, perhaps slightly undervalued at a 23.65% discount to what it is available for right now.
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 HOC, there are three essential aspects you should look at:
Financial Health: Does HOC 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 HOC’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 HOC? 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.
