Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Loma Negra Compañía Industrial Argentina Sociedad Anónima (NYSE:LOMA) as an investment opportunity. 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 March 2018 so be sure check the latest calculation for Loma Negra Compañía Industrial Argentina Sociedad Anónima here.
What’s the value?
I use what is known as the 2-stage 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 start off, I took the analyst consensus estimates of LOMA’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.49%. This resulted in a present value of 5-year cash flow of AR$8.19B. Want to understand how I arrived at this number? Check out our detailed analysis here.
In the visual above, we see how how LOMA’s top and bottom lines are expected to move in the future, which should give you some color on LOMA’s outlook. Secondly, I calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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. The present value of the terminal value after discounting it back five years is AR$66.12B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is AR$74.31B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $30.73, which, compared to the current share price of $22.17, we find that Loma Negra Compañía Industrial Argentina Sociedad Anónima is about right, perhaps slightly undervalued at a 27.86% 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 LOMA, I’ve compiled three relevant aspects you should look at:
-
Financial Health: Does LOMA 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 LOMA’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 LOMA? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!