Estimating The Intrinsic Value Of Carrier Global Corporation (NYSE:CARR)




  • In Business
  • 2020-10-17 13:03:44Z
  • By Simply Wall St.
Estimating The Intrinsic Value Of Carrier Global Corporation (NYSE:CARR)
Estimating The Intrinsic Value Of Carrier Global Corporation (NYSE:CARR)  

Today we will run through one way of estimating the intrinsic value of Carrier Global Corporation (NYSE:CARR) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

View our latest analysis for Carrier Global

Step by step through the calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$1.36b

US$1.63b

US$2.11b

US$2.21b

US$2.29b

US$2.37b

US$2.44b

US$2.50b

US$2.57b

US$2.63b

Growth Rate Estimate Source

Analyst x7

Analyst x4

Analyst x1

Analyst x1

Est @ 3.7%

Est @ 3.26%

Est @ 2.95%

Est @ 2.73%

Est @ 2.58%

Est @ 2.47%

Present Value ($, Millions) Discounted @ 11%

US$1.2k

US$1.3k

US$1.6k

US$1.5k

US$1.4k

US$1.3k

US$1.2k

US$1.1k

US$1.0k

US$948

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$13b

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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 11%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r - g) = US$2.6b× (1 + 2.2%) ÷ (11%- 2.2%) = US$32b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$32b÷ ( 1 + 11%)10= US$11b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$24b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$32.8, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Carrier Global 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 11%, which is based on a levered beta of 1.420. 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, the DCF calculation shouldn't be the only metric you look at when researching 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Carrier Global, we've put together three important elements you should explore:

  1. Risks: We feel that you should assess the 3 warning signs for Carrier Global (1 makes us a bit uncomfortable!) we've flagged before making an investment in the company.

  2. Future Earnings: How does CARR'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 NYSE every day. If you want to find the calculation for other stocks just search here.

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. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.

COMMENTS

More Related News

Don
Don't Buy South Port New Zealand Limited (NZSE:SPN) For Its Next Dividend Without Doing These Checks

South Port New Zealand Limited (NZSE:SPN) stock is about to trade ex-dividend in four days. You will need to purchase...

Don
Don't Race Out To Buy Morneau Shepell Inc. (TSE:MSI) Just Because It's Going Ex-Dividend

Morneau Shepell Inc. (TSE:MSI) stock is about to trade ex-dividend in 3 days. This means that investors who purchase...

AgJunction (TSE:AJX) Is In A Good Position To Deliver On Growth Plans
AgJunction (TSE:AJX) Is In A Good Position To Deliver On Growth Plans

There's no doubt that money can be made by owning shares of unprofitable businesses. For example, although...

Is Acacia Research (NASDAQ:ACTG) Using Debt In A Risky Way?
Is Acacia Research (NASDAQ:ACTG) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to...

Antofagasta plc
Antofagasta plc's (LON:ANTO) Intrinsic Value Is Potentially 37% Above Its Share Price

In this article we are going to estimate the intrinsic value of Antofagasta plc (LON:ANTO) by taking the expected...

Leave a Comment

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

Cancel reply

Comments

Top News: Business