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Estimating The Intrinsic Value Of Barco NV (EBR:BAR)

I am going to run you through how I calculated the intrinsic value of Barco NV (EBR:BAR) by estimating the company’s 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 September 2018 then I highly recommend you check out the latest calculation for Barco by following the link below.

View our latest analysis for Barco

What’s the value?

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. To begin with we have to get estimates of the next five years of cash flows. 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)

€76.00

€92.00

€94.17

€96.40

€98.68

Source

Analyst x1

Analyst x1

Est @ 2.36%

Est @ 2.36%

Est @ 2.36%

Present Value Discounted @ 8.65%

€69.95

€77.93

€73.42

€69.17

€65.16

Present Value of 5-year Cash Flow (PVCF)= €355.6m

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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 0.9%. We discount this to today’s value at a cost of equity of 8.7%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €98.7m × (1 + 0.9%) ÷ (8.7% – 0.9%) = €1.29b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €1.29b ÷ ( 1 + 8.7%)5 = €851.5m

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 €1.21b. The last step is to then 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) then we use the equivalent number. This results in an intrinsic value of €96.9. Compared to the current share price of €115.2, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

ENXTBR:BAR Intrinsic Value Export September 12th 18
ENXTBR:BAR Intrinsic Value Export September 12th 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. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Barco 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 0.852. 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 BAR, I’ve compiled three important factors you should further research:

  1. Financial Health: Does BAR 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 BAR’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 BAR? 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 EBR 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.