Is Suncor Energy Inc (TSE:SU) Worth $46.15 Based On Its Intrinsic Value?
How far off is Suncor Energy Inc (TSX:SU) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced 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 January 2018 then I highly recommend you check out the latest calculation for Suncor Energy here.
Is SU fairly valued?
I’ve used 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 perpetual stable growth rate. Firstly, I use the analyst consensus estimates of SU’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 11.22%. 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 CA$19,239.0M. Keen to understand how I arrived at this number? Read our detailed analysis here.
The infographic above illustrates how SU’s earnings are expected to move going forward, which should give you an idea of SU’s outlook. Now we need to calculate the terminal value, which accounts for all the future cash flows after the five years. 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 CA$36,945.3M.
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 CA$56,184.3M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of CA$34.11, which, compared to the current share price of CA$46.15, we see that Suncor Energy is rather overvalued at the time of writing.
Next Steps:
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 SU, I’ve put together three important factors you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the TSX 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.
