Estimate of the fair value of Compagnie de l’Odet (EPA: ODET)
In this article, we will estimate the intrinsic value of Compagnie de l’Odet (EPA: ODET) by estimating the company’s future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don’t be put off by the lingo, the underlying calculations are actually pretty straightforward.
There are many ways that businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. Anyone interested in learning a bit more about intrinsic value should read the Simply Wall St.
Discover our latest analysis for the Compagnie de l’Odet
Step by step in the calculation
We use the 2-step growth model, which simply means that we take into account two stages of business growth. During the initial period, the business can have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. To begin with, we need to get cash flow estimates for the next ten years. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. 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 down more in the early years than in subsequent years.
In general, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of those future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) forecast
|Leverage FCF (€, Millions)||€ 815.6m||€ 630.5m||€ 531.0m||€ 472.8 million||€ 437.1m||€ 414.4m||€ 399.8m||390.3 M €||€ 384.2m||€ 380.4m|
|Source of estimated growth rate||Is @ -32.57%||Is @ -22.7%||Is @ -15.78%||Is @ -10.95%||Is @ -7.56%||Is @ -5.19%||Is @ -3.53%||East @ -2.37%||Is @ -1.56%||Is @ -0.99%|
|Present value (€, Millions) discounted at 9.9%||€ 742||€ 522||€ 400||€ 324||€ 272||€ 235||206 €||€ 183||164 €||€ 148|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = € 3.2bn
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. 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 used the 5-year average of the 10-year government bond yield (0.3%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 9.9%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = € 380m × (1 + 0.3%) ÷ (9.9% – 0.3%) = € 4.0bn
Present value of terminal value (PVTV)= TV / (1 + r)ten= € 4.0bn ÷ (1 + 9.9%)ten= € 1.5bn
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is 4.7 billion euros. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of 1.1 k €, the company appears at fair value with a discount of 0.09% compared to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
We draw your attention to the fact that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with these results, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we consider Compagnie de l’Odet as potential shareholders, 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 9.9%, which is based on a leveraged beta of 1.999. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Move on :
Valuation is only one side of the coin in terms of building your investment thesis, and it’s just one of the many factors you need to evaluate for a business. DCF models are not the ultimate solution for investment valuation. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For the Compagnie de l’Odet, we have compiled three relevant elements for further study:
- Risks: Every company has them, and we have spotted 2 warning signs for the Compagnie de l’Odet (1 of which is potentially serious!) that you should be aware of.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!
- Other picks from top analysts: Interested in seeing what analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think might have a compelling outlook for the future!
PS. Simply Wall St updates its DCF calculation for every French stock every day, so if you want to find the intrinsic value of any other stock just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.