A Look At The Fair Value Of CTS Eventim AG & Co. KGaA (ETR:EVD)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, CTS Eventim KGaA fair value estimate is €75.22

• CTS Eventim KGaA's €73.50 share price indicates it is trading at similar levels as its fair value estimate

• Our fair value estimate is 1.2% lower than CTS Eventim KGaA's analyst price target of €76.10

In this article we are going to estimate the intrinsic value of CTS Eventim AG & Co. KGaA (ETR:EVD) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for CTS Eventim KGaA

Is CTS Eventim KGaA Fairly Valued?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (€, Millions)	€324.0m	€341.8m	€349.0m	€354.3m	€358.7m	€362.4m	€365.6m	€368.5m	€371.1m	€373.6m
Growth Rate Estimate Source	Analyst x4	Analyst x5	Analyst x1	Est @ 1.52%	Est @ 1.23%	Est @ 1.03%	Est @ 0.89%	Est @ 0.79%	Est @ 0.72%	Est @ 0.67%
Present Value (€, Millions) Discounted @ 5.4%	€307	€307	€298	€287	€275	€264	€252	€241	€230	€220

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €2.7b

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 a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.6%. We discount the terminal cash flows to today's value at a cost of equity of 5.4%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = €374m× (1 + 0.6%) ÷ (5.4%– 0.6%) = €7.7b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €7.7b÷ ( 1 + 5.4%)¹⁰= €4.5b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €7.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of €73.5, the company appears about fair value at a 2.3% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at CTS Eventim KGaA as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 5.4%, which is based on a levered beta of 1.060. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for CTS Eventim KGaA

Strength

• Earnings growth over the past year exceeded the industry.

• Currently debt free.

• Dividends are covered by earnings and cash flows.

Weakness

• Dividend is low compared to the top 25% of dividend payers in the Entertainment market.

Opportunity

• Current share price is below our estimate of fair value.

Threat

• Annual earnings are forecast to decline for the next 3 years.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For CTS Eventim KGaA, we've put together three fundamental items you should consider:

1. Risks: To that end, you should be aware of the 1 warning sign we've spotted with CTS Eventim KGaA .

2. Future Earnings: How does EVD'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the XTRA every day. If you want to find the calculation for other stocks just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.