I am going to run you through how I calculated the intrinsic value of Altran Technologies SA. (ENXTPA:ALT) using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in May 2018 so be sure check the latest calculation for Altran Technologies here.
Is ALT fairly valued?
I’ve used 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 start off, I pulled together the analyst consensus estimates of ALT’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.53%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of €955.53M. Keen to know how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how ALT’s earnings are expected to move going forward, which should give you an idea of ALT’s outlook. Next, I calculate the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is €2.60B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €3.55B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of €13.99, which, compared to the current share price of €13.13, we see that Altran Technologies is about right, perhaps slightly undervalued at a 6.16% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For ALT, I’ve put together three essential factors you should further research:
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Financial Health: Does ALT 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.
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Future Earnings: How does ALT’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.
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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ALT? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!