Yahoo Finance Calculating The Intrinsic Value Of Travis Perkins plc (LON:TPK)
In this article I am going to calculate the intrinsic value of Travis Perkins plc (LSE:TPK) 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. Also note that this article was written in June 2018 so be sure check the latest calculation for Travis Perkins here.
Is TPK 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 TPK’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.28%. 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 UK£958.27M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how TPK’s top and bottom lines are expected to move going forward, which should give you an idea of TPK’s outlook. Then, I determine 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. The present value of the terminal value after discounting it back five years is UK£2.41B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is UK£3.37B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £13.61, which, compared to the current share price of £13.455, we see that Travis Perkins is about right, perhaps slightly undervalued at a 1.16% 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 TPK, there are three fundamental factors you should further research:
Financial Health: Does TPK 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 TPK’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 TPK? 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.
