Is Nucor Corporation (NYSE: NUE) worth US $ 102 based on intrinsic value?
Does Nucor Corporation’s (NYSE: NUE) share price in May reflect what it’s really worth? Today, we’re going to estimate the intrinsic value of the stock by taking the company’s expected future cash flows and discounting them to present value. One way to do this is to use the Discounted Cash Flow (DCF) model. Before you think you won’t be able to figure it out, read on! It’s actually a lot less complex than you might imagine.
We generally believe that the value of a business is the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. Anyone interested in learning a little more about intrinsic value should have a read of the Simply Wall St.
Check out our latest analysis for Nucor
What is the estimated valuation?
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 estimate the next ten years of cash flow. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or the last reported value. We assume that companies with decreasing free cash flow will slow their withdrawal rate, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow down more in the early years than in the later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and therefore the sum of these future cash flows is then discounted to present value:
10-year free cash flow (FCF) estimate
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Levered FCF ($, million) | USD 2.21 billion | $ 1.36 billion | 1.52 billion USD | $ 1.42 billion | $ 1.37 billion | $ 1.34 billion | $ 1.33 billion | $ 1.33 billion | $ 1.33 billion | $ 1.35 billion |
Source of estimated growth rate | Analyst x5 | Analyst x5 | Analyst x2 | Is at -6.48% | Is at -3.94% | Is at -2.16% | Is at -0.92% | East @ -0.04% | Is 0.57% | Is 0.99% |
Present value ($, millions) discounted at 7.4% | US $ 2.1K | US $ 1.2K | US $ 1.2K | US $ 1.1K | US $ 956 | US $ 871 | US $ 803 | US $ 747 | US $ 700 | US $ 658 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = 10 billion USD
Now we need to calculate the terminal value, which takes into account all future cash flows after that ten year period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 7.4%.
Terminal value (TV)= FCF_{2030} × (1 + g) ÷ (r – g) = $ 1.3 billion × (1 + 2.0%) ÷ (7.4% – 2.0%) = $ 25 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= 25 billion USD ÷ (1 + 7.4%)^{ten}= 12 billion USD
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is US $ 23 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 US $ 102, the company appears potentially overvalued at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
Important assumptions
Now the most important data for a discounted cash flow is the discount rate and, of course, the actual cash flow. You don’t have to agree with these entries, I recommend that you redo the math yourself and play around with it. 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 complete picture of a company’s potential performance. Since we view Nucor 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 into account debt. In this calculation, we used 7.4%, which is based on a leveraged beta of 1.152. 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 globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next steps:
While valuing a business is important, it is only one of the many factors you need to assess for a business. DCF models are not the alpha and omega of investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. What is the reason why the stock price exceeds intrinsic value? For Nucor, there are three essential elements to consider:
- Risks: For example, we discovered 4 warning signs for Nucor (1 makes us a little uncomfortable!) Which you should be aware of before investing here.
- Management: Have insiders increased their shares to take advantage of market sentiment for NUE’s future outlook? Check out our management and board analysis with information on CEO compensation and governance factors.
- Other strong companies: Low debt, high returns on equity, and good past performance are essential 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!
PS. Simply Wall St updates its DCF calculation for every US 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. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim 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 information. Simply Wall St has no position in any of the stocks mentioned.
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