Are investors undervaluing CRH plc (LON:CRH) by 50%?
In this article, we will estimate the intrinsic value of CRH plc (LON:CRH) by estimating the future cash flows of the business and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Patterns like these may seem beyond a layman’s comprehension, but they’re pretty easy to follow.
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Discover our latest analysis for CRH
What is the estimated value?
We will use a twostage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
Generally, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:
Estimated free cash flow (FCF) over 10 years
2023 
2024 
2025 
2026 
2027 
2028 
2029 
2030 
2031 
2032 

Leveraged FCF ($, millions) 
$2.58 billion 
$2.66 billion 
US$3.05 billion 
US$3.34 billion 
$3.53 billion 
$3.69 billion 
$3.82 billion 
$3.92 billion 
US$4.01 billion 
$4.08 billion 
Growth rate estimate Source 
Analyst x11 
Analyst x10 
Analyst x3 
Analyst x1 
Is 5.98% 
Is at 4.49% 
Is at 3.44% 
Is at 2.7% 
Is at 2.19% 
Is at 1.83% 
Present value (millions of dollars) discounted at 7.0% 
$2,400 
$2,300 
$2.5,000 
$2.5,000 
$2.5,000 
$2.5,000 
$2,400 
$2,300 
$2,200 
$2,100 
(“East” = FCF growth rate estimated by Simply Wall St)
10year discounted cash flow (PVCF) = $24 billion
We now need to calculate the terminal value, which represents all future cash flows after this tenyear period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5year average of the 10year government bond yield of 1.0%. We discount terminal cash flows to present value at a cost of equity of 7.0%.
Terminal value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = US$4.1 billion × (1 + 1.0%) ÷ (7.0%–1.0%) = US$68 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $68 billion ÷ (1 + 7.0%)^{ten}= $35 billion
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is $58 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of £33.0 in the UK, the company appears to be pretty good value with a 50% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.
The hypotheses
We emphasize that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider CRH as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 7.0%, which is based on a leveraged beta of 0.998. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Next steps:
Although the valuation of a business is important, it will ideally not be the only piece of analysis you will look at for a business. The DCF model is not a perfect stock valuation tool. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. If a company grows at a different pace, or if its cost of equity or riskfree rate changes sharply, output may be very different. Why is the stock price below intrinsic value? For CRH, there are three important aspects that you should examine in more detail:

Risks: Every business has them, and we’ve spotted 2 warning signs for CRH (1 of which makes us a little uncomfortable!) that you should know.

Management:Have insiders increased their shares to take advantage of market sentiment about CRH’s future prospects? View our management and board analysis with insights into CEO compensation and governance factors.

Other highquality alternatives: Do you like a good allrounder? Explore our interactive list of highquality actions to get an idea of what you might be missing!
PS. The Simply Wall St app performs an updated cash flow valuation for every stock on the LSE every day. If you want to find the calculation for other stocks, search here.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted longterm analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from pricesensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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