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Estimating The Intrinsic Value Of Deutsche EuroShop AG (ETR:DEQ)

In This Article:

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Deutsche EuroShop fair value estimate is €18.17

  • Deutsche EuroShop's €21.15 share price indicates it is trading at similar levels as its fair value estimate

  • The €23.03 analyst price target for DEQ is 27% more than our estimate of fair value

Today we will run through one way of estimating the intrinsic value of Deutsche EuroShop AG (ETR:DEQ) by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Deutsche EuroShop

What's The Estimated Valuation?

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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF (€, Millions)

€117.6m

€120.5m

€111.0m

€105.2m

€101.5m

€99.3m

€98.1m

€97.5m

€97.2m

€97.3m

Growth Rate Estimate Source

Analyst x2

Analyst x2

Est @ -7.85%

Est @ -5.26%

Est @ -3.44%

Est @ -2.16%

Est @ -1.27%

Est @ -0.65%

Est @ -0.21%

Est @ 0.10%

Present Value (€, Millions) Discounted @ 7.8%

€109

€104

€88.6

€77.9

€69.7

€63.3

€58.0

€53.4

€49.4

€45.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €719m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (0.8%) 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 7.8%.