Yahoo Finance Calculating The Fair Value Of Eurofins Scientific SE (EPA:ERF)
Does the share price for Eurofins Scientific SE (EPA:ERF) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by taking the expected future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not June 2018 then I highly recommend you check out the latest calculation for Eurofins Scientific by following the link below. Check out our latest analysis for Eurofins Scientific
The method
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. To begin with we have to get estimates of the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow estimate
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF (€, Millions) | €242.50 | €294.75 | €396.78 | €464.24 | €538.51 |
Source | Analyst x6 | Analyst x8 | Analyst x6 | Extrapolated @ (17%, capped from 22.9%) | Extrapolated @ (16%, capped from 22.9%) |
Present Value Discounted @ 8.16% | €224.21 | €251.97 | €313.62 | €339.27 | €363.87 |
Present Value of 5-year Cash Flow (PVCF)= €1.49b
After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 0.8%. We discount this to today’s value at a cost of equity of 8.2%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €538.51m × (1 + 0.8%) ÷ (8.2% – 0.8%) = €7.36b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €7.36b ÷ ( 1 + 8.2%)5 = €4.97b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €6.46b. 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 €365.51. Compared to the current share price of €410.8, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.
Important 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. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Eurofins Scientific 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 8.2%, which is based on a levered beta of 0.800. 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:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For ERF, there are three fundamental aspects you should further research:
Financial Health: Does ERF 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 ERF’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 ERF? 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 EPA 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.
