Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Genesee & Wyoming Inc (NYSE:GWR) 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 June 2018 then I highly recommend you check out the latest calculation for Genesee & Wyoming here.
Crunching the numbers
I’ve used the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To start off, I pulled together the analyst consensus estimates of GWR’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 9.91%. This resulted in a present value of 5-year cash flow of US$1.53B. Keen to know how I calculated this value? Take a look at our detailed analysis here.
The graph above shows how GWR’s top and bottom lines are expected to move going forward, which should give you some color on GWR’s outlook. Then, I calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable 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 US$4.59B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$6.12B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $100.59, which, compared to the current share price of $79.61, we see that Genesee & Wyoming is about right, perhaps slightly undervalued at a 20.86% 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. What is the reason for the share price to differ from the intrinsic value? For GWR, I’ve put together three essential aspects you should look at:
-
Financial Health: Does GWR 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 GWR’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 GWR? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!