Yahoo Finance Calculating The Intrinsic Value Of Swisscom AG (VTX:SCMN)
I am going to run you through how I calculated the intrinsic value of Swisscom AG (VTX:SCMN) by taking the expected future cash flows and discounting them to today’s value. I will use 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. Please also note that this article was written in September 2018 so be sure check out the updated calculation by following the link below.
View our latest analysis for Swisscom
Crunching the numbers
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow estimate
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF (CHF, Millions) | CHF1.27k | CHF1.29k | CHF1.36k | CHF1.37k | CHF1.37k |
Source | Analyst x7 | Analyst x5 | Analyst x1 | Est @ 0.3% | Est @ 0.3% |
Present Value Discounted @ 8.74% | CHF1.17k | CHF1.09k | CHF1.06k | CHF976.98 | CHF901.14 |
Present Value of 5-year Cash Flow (PVCF)= CHF5.20b
The second stage is also known as Terminal Value, this is the business’s cash flow after 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 3.7%. We discount this to today’s value at a cost of equity of 8.7%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = CHF1.37b × (1 + 3.7%) ÷ (8.7% – 3.7%) = CHF28.24b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = CHF28.24b ÷ ( 1 + 8.7%)5 = CHF18.58b
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 CHF23.77b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of CHF458.95. Compared to the current share price of CHF432.9, the stock is about right, perhaps slightly undervalued at a 5.7% discount to what it is available for right now.
Important assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Swisscom 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 8.7%, 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:
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 SCMN, I’ve put together three essential aspects you should look at:
Financial Health: Does SCMN 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 SCMN’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 SCMN? 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 VTX every 6 hours. If you want to find the calculation for other stocks 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.
