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MSA Safety Incorporated's (NYSE:MSA) Intrinsic Value Is Potentially 26% Below Its Share Price

In This Article:

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of MSA Safety Incorporated (NYSE:MSA) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for MSA Safety

Step by step through the calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Levered FCF ($, Millions)

US$149.6m

US$181.3m

US$181.2m

US$182.3m

US$184.1m

US$186.4m

US$189.2m

US$192.3m

US$195.6m

US$199.1m

Growth Rate Estimate Source

Analyst x2

Analyst x2

Est @ -0.03%

Est @ 0.57%

Est @ 0.99%

Est @ 1.28%

Est @ 1.48%

Est @ 1.63%

Est @ 1.73%

Est @ 1.8%

Present Value ($, Millions) Discounted @ 6.2%

US$141

US$161

US$151

US$143

US$136

US$130

US$124

US$119

US$114

US$109

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.3b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.2%.