Yahoo Finance Calculating The Intrinsic Value Of Anglo American plc (LON:AAL)
Does the share price for Anglo American plc (LSE:AAL) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in June 2018 so be sure check the latest calculation for Anglo American here.
What’s the value?
I will be using the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To start off, I pulled together the analyst consensus forecast of AAL’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 11.36%. This resulted in a present value of 5-year cash flow of US$12.78B. Keen to know how I arrived at this number? Take a look at our detailed analysis here.
Above is a visual representation of how AAL’s earnings are expected to move in the future, which should give you some color on AAL’s outlook. Secondly, I determine 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 US$23.72B.
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$36.50B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £19.41, which, compared to the current share price of £18.82, we see that Anglo American is about right, perhaps slightly undervalued at a 3.03% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company.
For AAL, I’ve compiled three pertinent factors you should further examine:
Financial Health: Does AAL 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 AAL’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 AAL? 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 GB stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.
