Does the share price for Reckitt Benckiser Group plc (LSE:RB.) 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 May 2018 so be sure check the latest calculation for Reckitt Benckiser Group here.
Is RB. fairly valued?
We are going to use a two-stage DCF 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 estimates of RB.’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.3%. This resulted in a present value of 5-year cash flow of UK£11.19B. Want to understand how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how RB.’s earnings are expected to move going forward, which should give you an idea of RB.’s outlook. Then, 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. Discounting the terminal value back five years gives us a present value of UK£35.29B.
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 UK£46.48B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £65.97, which, compared to the current share price of £59.03, we find that Reckitt Benckiser Group is about right, perhaps slightly undervalued at a 10.52% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For RB., I’ve compiled three important aspects you should look at:
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Financial Health: Does RB. 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 RB.’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 RB.? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!