In This Article:
In this article I am going to calculate the intrinsic value of TopBuild Corp (NYSE:BLD) using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after April 2018 then I highly recommend you check out the latest calculation for TopBuild here.
Is BLD fairly valued?
I will be using 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. To begin, I took the analyst consensus forecast of BLD’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 9.46%. 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 US$525.85M. Keen to know how I arrived at this number? Take a look at our detailed analysis here.
In the visual above, we see how how BLD’s earnings are expected to move in the future, which should give you some color on BLD’s outlook. Next, 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. Discounting the terminal value back five years gives us a present value of US$1.54B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$2.07B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $58.04, which, compared to the current share price of $79.01, we see that TopBuild is rather 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. What is the reason for the share price to differ from the intrinsic value? For BLD, I’ve put together three pertinent aspects you should look at:
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Financial Health: Does BLD 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 BLD’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 BLD? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!