Intrinsic Calculation For BASF SE (FRA:BAS) Shows Investors Are Overpaying

I am going to run you through how I calculated the intrinsic value of BASF SE (DB:BAS) 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 BASF here.

Crunching the numbers

I use what is known as the 2-stage 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. Firstly, I use the analyst consensus forecast of BAS’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 9.41%. This resulted in a present value of 5-year cash flow of €21.39B. Want to understand how I arrived at this number? Read our detailed analysis here.

DB:BAS Future Profit Jun 12th 18

Above is a visual representation of how BAS’s top and bottom lines are expected to move going forward, which should give you some color on BAS’s outlook. Secondly, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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. After discounting the terminal value back five years, the present value becomes €44.47B.

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 €65.85B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of €71.70, which, compared to the current share price of €87.89, we find that BASF is fair value, maybe slightly overvalued at the time of writing.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For BAS, I’ve compiled three important aspects you should further research:

1. Financial Health: Does BAS 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 BAS’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 BAS? 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 DE 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.