Does the January share price for ams AG (VTX:AMS) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by taking the foreast future cash flows of the company and discounting them back to today’s value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in January 2019 so be sure check out the updated calculation by following the link below.
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The method
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow forecast
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF (€, Millions) | €193.82 | €351.28 | €294.00 | €404.00 | €389.00 |
| Source | Analyst x9 | Analyst x6 | Analyst x1 | Analyst x1 | Analyst x1 |
| Present Value Discounted @ 13.68% | €170.48 | €271.80 | €200.10 | €241.86 | €204.85 |
Present Value of 5-year Cash Flow (PVCF)= €1.1b
After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 3.3%. We discount this to today’s value at a cost of equity of 13.7%.
Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = €389m × (1 + 3.3%) ÷ (13.7% – 3.3%) = €3.9b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €3.9b ÷ ( 1 + 13.7%)5 = €2.0b
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 €3.1b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of CHF42.92. Relative to the current share price of CHF22.98, the stock is quite good value at a 46% discount to what it is available for right now.