In This Article:
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Alten SA (ENXTPA:ATE) 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. If you are reading this after March 2018 then I highly recommend you check out the latest calculation for Alten here.
Is ATE fairly valued?
I’ve used the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Firstly, I took the analyst consensus estimates of ATE’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.18%. 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 €611.74M. Keen to know how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how ATE’s earnings are expected to move in the future, which should give you some color on ATE’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of €1.78B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €2.39B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of €71.62, which, compared to the current share price of €78.25, we see that Alten is fair value, maybe slightly overvalued at the time of writing.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company.
For ATE, I’ve put together three important aspects you should look at:
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Financial Health: Does ATE 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.
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Future Earnings: How does ATE’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.
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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ATE? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!