Advertisement
U.S. Markets closed
  • S&P 500

    5,254.35
    +5.86 (+0.11%)
     
  • Dow 30

    39,807.37
    +47.29 (+0.12%)
     
  • Nasdaq

    16,379.46
    -20.06 (-0.12%)
     
  • Russell 2000

    2,124.55
    +10.20 (+0.48%)
     
  • Crude Oil

    83.11
    -0.06 (-0.07%)
     
  • Gold

    2,254.80
    +16.40 (+0.73%)
     
  • Silver

    25.10
    +0.18 (+0.74%)
     
  • EUR/USD

    1.0797
    +0.0003 (+0.0324%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • Vix

    13.01
    0.00 (0.00%)
     
  • GBP/USD

    1.2625
    +0.0002 (+0.0189%)
     
  • USD/JPY

    151.3030
    -0.0690 (-0.0456%)
     
  • BTC-USD

    69,993.75
    -724.06 (-1.02%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,369.44
    +201.37 (+0.50%)
     

Is TransDigm Group Incorporated (NYSE:TDG) Worth US$373 Based On Intrinsic Value?

I am going to run you through how I calculated the intrinsic value of TransDigm Group Incorporated (NYSE:TDG) by taking the expected future cash flows and discounting them to their present value. This is done using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! 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 and its not September 2018 then I highly recommend you check out the latest calculation for TransDigm Group by following the link below.

View our latest analysis for TransDigm Group

The calculation

I’m 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 perpetual stable growth rate. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

2019

2020

2021

2022

2023

Levered FCF ($, Millions)

$962.93

$1.09k

$1.23k

$1.43k

$1.62k

Source

Analyst x7

Analyst x4

Analyst x1

Analyst x1

Est @ 13.37%

Present Value Discounted @ 11.26%

$865.48

$877.93

$892.37

$933.24

$950.93

Present Value of 5-year Cash Flow (PVCF)= US$4.52b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 11.3%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$1.62b × (1 + 2.9%) ÷ (11.3% – 2.9%) = US$20.09b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$20.09b ÷ ( 1 + 11.3%)5 = US$11.78b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$16.30b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of $309.76. Relative to the current share price of $372.82, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

NYSE:TDG Intrinsic Value Export September 19th 18
NYSE:TDG Intrinsic Value Export September 19th 18

The assumptions

I’d like to point out that 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at TransDigm Group as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 11.3%, which is based on a levered beta of 1.179. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

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 TDG, I’ve put together three key factors you should further research:

  1. Financial Health: Does TDG 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 TDG’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.

  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of TDG? 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 does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Advertisement