Calculating The Intrinsic Value Of First Sensor AG (ETR:SIS)




  • In Business
  • 2019-05-16 06:34:05Z
  • By Simply Wall St.
 

In this article we are going to estimate the intrinsic value of First Sensor AG (ETR:SIS) by taking the expected future cash flows and discounting them to their present value. I will use the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Check out our latest analysis for First Sensor

The calculation

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. To start off with, we need to estimate the next ten years of cash flows. 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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

Present Value of 10-year Cash Flow (PVCF)= €87.30m

"Est" = FCF growth rate estimated by Simply Wall St

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 10-year government bond rate (0.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.5%.

Terminal Value (TV) = FCF2029 × (1 + g) ÷ (r - g) = €16m × (1 + 0.2%) ÷ (7.5% - 0.2%) = €226m

Present Value of Terminal Value (PVTV) = TV / (1 + r)10 = €€226m ÷ ( 1 + 7.5%)10 = €109.72m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is €197.02m. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value estimate of €19.27. Relative to the current share price of €21.9, the company appears around fair value at the time of writing. 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.

Important 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 First Sensor 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 7.5%, which is based on a levered beta of 1.221. 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.

Next Steps:

Whilst important, DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 First Sensor, I've put together three additional factors you should further examine:

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

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.

COMMENTS

More Related News

Know This Before Buying Sands China Ltd. (HKG:1928) For Its Dividend
Know This Before Buying Sands China Ltd. (HKG:1928) For Its Dividend

Could Sands China Ltd. (HKG:1928) be an attractive dividend share to own for the long haul? Investors are often drawn...

Estimating The Intrinsic Value Of Forterra, Inc. (NASDAQ:FRTA)
Estimating The Intrinsic Value Of Forterra, Inc. (NASDAQ:FRTA)

How far off is Forterra, Inc. (NASDAQ:FRTA) from its intrinsic value? Using the most recent financial data, we'll take...

Calculating The Intrinsic Value Of Proofpoint, Inc. (NASDAQ:PFPT)
Calculating The Intrinsic Value Of Proofpoint, Inc. (NASDAQ:PFPT)

In this article we are going to estimate the intrinsic value of Proofpoint, Inc. (NASDAQ:PFPT) by projecting its...

Should You Consider Perseus SA (ATH:PERS)?
Should You Consider Perseus SA (ATH:PERS)?

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift...

A Look At The Fair Value Of CFT S.p.A (BIT:CFT)
A Look At The Fair Value Of CFT S.p.A (BIT:CFT)

Does the May share price for CFT S.p.A (BIT:CFT) reflect what it's really worth? Today, we will estimate the stock's...

Leave a Comment

Your email address will not be published. Required fields are marked with *

Cancel reply

Comments

Top News: Business

facebook
Hit "Like"
Don't miss any important news
Thanks, you don't need to show me this anymore.