Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Park-Ohio Holdings Corp (NASDAQ:PKOH) 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. Also note that this article was written in February 2018 so be sure check the latest calculation for Park-Ohio Holdings here.
What’s the value?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. Firstly, I pulled together the analyst consensus forecast of PKOH’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 12.84%. This resulted in a present value of 5-year cash flow of $261.0M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how PKOH’s earnings are expected to move going forward, which should give you some color on PKOH’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 steady 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 $482.2M.
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 $743.2M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $59.31, which, compared to the current share price of $40.2, we see that Park-Ohio Holdings is quite good value at a 32.22% discount to what it is available for right now.
Whilst important, DCF calculation 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 PKOH, I’ve compiled three fundamental aspects you should look at:
- 1. Financial Health: Does PKOH 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.
- 2. Future Earnings: How does PKOH’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.
- 2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of PKOH? 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 NASDAQ 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.