Does the share price for GKN plc (LSE:GKN) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. 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. Also note that this article was written in January 2018 so be sure check the latest calculation for GKN here.
Is GKN 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 pulled together the analyst consensus estimates of GKN’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.56%. 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 £1,550.2M. Keen to know how I arrived at this number? Take a look at our detailed analysis here.
Above is a visual representation of how GKN’s top and bottom lines are expected to move in the future, which should give you an idea of GKN’s outlook. Now we need to calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable 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. Discounting the terminal value back five years gives us a present value of £4,019.6M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is £5,569.8M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £3.24, which, compared to the current share price of £3.259, we find that GKN is fair value, maybe slightly overvalued and not available at a discount at this time.
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 GKN, there are three essential aspects you should further research:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the LSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.