Is Comet Holding AG (VTX:COTN) Trading At A 22% Discount?

editorial-team@simplywallst.com (Simply Wall St)

Sat, Jan 20, 2024, 11:16 PM 6 min read

Key Insights

Using the 2 Stage Free Cash Flow to Equity, Comet Holding fair value estimate is CHF348
Comet Holding is estimated to be 22% undervalued based on current share price of CHF273
Analyst price target for COTN is CHF267 which is 23% below our fair value estimate

In this article we are going to estimate the intrinsic value of Comet Holding AG (VTX:COTN) by estimating the company's future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for Comet Holding

The Calculation

We're 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 a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CHF, Millions)	CHF39.9m	CHF84.6m	CHF104.9m	CHF122.6m	CHF137.1m	CHF148.4m	CHF157.1m	CHF163.5m	CHF168.2m	CHF171.7m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 24.02%	Est @ 16.84%	Est @ 11.81%	Est @ 8.29%	Est @ 5.83%	Est @ 4.10%	Est @ 2.90%	Est @ 2.05%
Present Value (CHF, Millions) Discounted @ 5.7%	CHF37.7	CHF75.8	CHF89.0	CHF98.4	CHF104	CHF107	CHF107	CHF105	CHF103	CHF99.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CHF926m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (0.08%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 5.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CHF172m× (1 + 0.08%) ÷ (5.7%– 0.08%) = CHF3.1b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CHF3.1b÷ ( 1 + 5.7%)¹⁰= CHF1.8b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CHF2.7b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CHF273, the company appears a touch undervalued at a 22% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf — SWX:COTN Discounted Cash Flow January 21st 2024

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Comet Holding as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 5.7%, which is based on a levered beta of 1.114. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Comet Holding

Strength

Debt is not viewed as a risk.

Weakness

Earnings declined over the past year.

Dividend is low compared to the top 25% of dividend payers in the Electronic market.

Opportunity

Annual earnings are forecast to grow faster than the Swiss market.

Good value based on P/E ratio and estimated fair value.

Threat

Dividends are not covered by cash flow.

Revenue is forecast to grow slower than 20% per year.

Looking Ahead:

Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Comet Holding, we've compiled three relevant factors you should further research:

Risks: You should be aware of the 1 warning sign for Comet Holding we've uncovered before considering an investment in the company.
Future Earnings: How does COTN'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: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every Swiss stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.