In This Article:
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Tubos Reunidos SA. (BME:TRG) as an investment opportunity. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after May 2018 then I highly recommend you check out the latest calculation for Tubos Reunidos here.
Crunching the numbers
I use what is known as the 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I use the analyst consensus forecast of TRG’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 18.53%. 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 €41.54M. Keen to understand how I calculated this value? Check out our detailed analysis here.
In the visual above, we see how how TRG’s earnings are expected to move in the future, which should give you an idea of TRG’s outlook. Secondly, I determine 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 stable 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 €34.08M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €75.62M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of €0.43, which, compared to the current share price of €0.4045, we see that Tubos Reunidos is about right, perhaps slightly undervalued at a 6.80% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company.
For TRG, I’ve compiled three fundamental aspects you should further examine:
-
Financial Health: Does TRG 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.
-
Future Earnings: How does TRG’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.
-
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of TRG? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!