In this article I am going to calculate the intrinsic value of TE Connectivity Ltd (NYSE:TEL) using the discounted cash flows (DCF) model. 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 May 2018 then I highly recommend you check out the latest calculation for TE Connectivity here.

Crunching the numbers

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 TEL’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 9.55%. This resulted in a present value of 5-year cash flow of US$7.90B. Want to understand how I arrived at this number? Take a look at our detailed analysis here.

The infographic above illustrates how TEL’s earnings are expected to move in the future, which should give you some color on TEL’s outlook. Then, I calculate 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. After discounting the terminal value back five years, the present value becomes US$22.99B.

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 US$30.89B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $88.23, which, compared to the current share price of $95.43, we find that TE Connectivity is fair value, maybe slightly overvalued at the time of writing.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.

For TEL, I’ve put together three relevant aspects you should look at:

1. Financial Health: Does TEL 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.

2. Future Earnings: How does TEL’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.

3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of TEL? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!