Does the share price for US Concrete Inc (NASDAQ:USCR) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in January 2018 so be sure check the latest calculation for U.S. Concrete here.

What’s the value?

I use what is known as the 2-stage 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 perpetual stable growth rate. To begin, I use the analyst consensus forecast of USCR’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 10.06%. 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 $608.6M. Keen to know how I arrived at this number? Read our detailed analysis here.

The graph above shows how USCR’s top and bottom lines are expected to move going forward, which should give you an idea of USCR’s outlook. Secondly, 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 steady growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is $1,904.9M.

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 $2,513.5M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $158.51, which, compared to the current share price of $81.7, we see that U.S. Concrete is quite undervalued at a 48.46% 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. What is the reason for the share price to differ from the intrinsic value? For USCR, there are three fundamental aspects you should look at:

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.