In this article I am going to calculate the intrinsic value of Telstra Corporation Limited (ASX:TLS) using the discounted cash flows (DCF) model. 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 December 2017 so be sure check the latest calculation for Telstra here.
What’s the value?
I will be using 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. Firstly, I use the analyst consensus estimates of TLS’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.55%. This resulted in a present value of 5-year cash flow of A$14,511.4M. Keen to understand how I arrived at this number? Check out our detailed analysis here.
The infographic above illustrates how TLS’s top and bottom lines are expected to move in the future, which should give you an idea of TLS’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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. The present value of the terminal value after discounting it back five years is A$33,853.5M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is A$48,365.0M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of A$4.07, which, compared to the current share price of A$3.65, we see that Telstra is about right, perhaps slightly undervalued at a 10.35% 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 TLS, I’ve put together three pertinent factors you should further examine:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the ASX 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.