In this article I am going to calculate the intrinsic value of Barón de Ley SA. (BME:BDL) using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after March 2018 then I highly recommend you check out the latest calculation for Barón de Ley here.

Is BDL fairly valued?

I use what is known as the 2-stage model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To begin, I use the analyst consensus estimates of BDL’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.29%. 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 €101.09M. Keen to know how I calculated this value? Read our detailed analysis here.

In the visual above, we see how how BDL’s top and bottom lines are expected to move going forward, which should give you an idea of BDL’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the steady 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 €293.12M.

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €394.21M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of €95.90, which, compared to the current share price of €105, we find that Barón de Ley is fair value, maybe slightly overvalued at the time of writing.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.

For BDL, I’ve put together three essential factors you should further research:

1. Financial Health: Does BDL 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.

2. Future Earnings: How does BDL’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of BDL? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!