Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Vale SA (NYSE:VALE) as an investment opportunity. 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 Vale here.

Is VALE fairly valued?

I will be using the 2-stage growth 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 begin, I use the analyst consensus estimates of VALE’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 12.24%. 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 R$89,035.8M. Want to know how I calculated this value? Read our detailed analysis here.

Above is a visual representation of how VALE’s earnings are expected to move going forward, which should give you an idea of VALE’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes R$147,475.7M.

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 R$236,511.6M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of R$14.06, which, compared to the current share price of R$12.23, we find that Vale is about right, perhaps slightly undervalued at a 13.01% 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.

For VALE, I’ve compiled three pertinent factors you should further research:

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE 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.