How far off is CBRE Group Inc (NYSE:CBRE) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced 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. If you are reading this after March 2018 then I highly recommend you check out the latest calculation for CBRE Group here.

What’s the value?

I use what is known as the 2-stage model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off, I took the analyst consensus forecast of CBRE’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.91%. This resulted in a present value of 5-year cash flow of US$5.66B. Keen to understand how I arrived at this number? Check out our detailed analysis here.

The graph above shows how CBRE’s earnings are expected to move in the future, which should give you some color on CBRE’s outlook. Next, 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 stable 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 US$17.96B.

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 US$23.62B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $71.19, which, compared to the current share price of $46.48, we find that CBRE Group is quite undervalued at a 34.71% discount to what it is available for right now.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For CBRE, I’ve put together three key aspects you should look at:

1. Financial Health: Does CBRE 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 CBRE’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 CBRE? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!