Investors Are Undervaluing Atresmedia Corporación de Medios de Comunicación SA (BME:A3M) By 49.94%

Simply Wall St.

Mon, Oct 1, 2018, 12:28 AM

How far off is Atresmedia Corporación de Medios de Comunicación SA (BME:A3M) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them 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 October 2018 so be sure check out the updated calculation by following the link below.

See our latest analysis for Atresmedia Corporación de Medios de Comunicación

What’s the value?

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. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

	2019	2020	2021	2022	2023
Levered FCF (€, Millions)	€150.98	€157.87	€162.40	€170.88	€179.80
Source	Analyst x8	Analyst x9	Analyst x2	Est @ 5.22%	Est @ 5.22%
Present Value Discounted @ 8.26%	€139.46	€134.71	€128.00	€124.41	€120.93

Present Value of 5-year Cash Flow (PVCF)= €647.5m

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 1.3%. We discount this to today’s value at a cost of equity of 8.3%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = €179.8m × (1 + 1.3%) ÷ (8.3% – 1.3%) = €2.61b

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = €2.61b ÷ ( 1 + 8.3%)⁵ = €1.76b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €2.40b. In the final step we 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) or ADR then we use the equivalent number. This results in an intrinsic value of €10.69. Relative to the current share price of €5.35, the stock is quite good value at a 49.9% discount to what it is available for right now.

BME:A3M Intrinsic Value Export October 1st 18

The 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Atresmedia Corporación de Medios de Comunicación as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.3%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

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 A3M, there are three relevant aspects you should further examine:

Financial Health: Does A3M 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.
Future Earnings: How does A3M’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: Are there other high quality stocks you could be holding instead of A3M? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the BME every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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