Jabil Inc. (NYSE: JBL) shares may be 48% lower than their estimate of intrinsic value
Today we will review a valuation method used to estimate the attractiveness of Jabil Inc. (NYSE: JBL) as an investment opportunity by estimating the future cash flows of the business and discounting them to their current value. One way to do this is to use the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!
We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something of interest to you.
Crunch the numbers
We are going to use a two-step 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 “steady growth”. To begin with, we need to get cash flow estimates for the next ten years. 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 stated 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 down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of those future cash flows to their estimated value in today’s dollars. hui:
10-year Free Cash Flow (FCF) estimate
|Leverage FCF ($, Millions)||US $ 694.0 million||US $ 949.0 million||US $ 1.03 billion||US $ 1.10 billion||US $ 1.15 billion||US $ 1.20 billion||US $ 1.24 billion||US $ 1.27 billion||US $ 1.31 billion||US $ 1.34 billion|
|Source of estimated growth rate||Analyst x1||Analyst x1||Analyst x1||East @ 6.1%||Est @ 4.86%||Is @ 3.99%||East @ 3.38%||Est @ 2.95%||East @ 2.66%||East @ 2.45%|
|Present value (in millions of dollars) discounted at 7.9%||$ 643||$ 815||$ 823||US $ 809||786 USD||US $ 757||US $ 726||US $ 692||US $ 658||US $ 625|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 7.3 billion
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. 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 (2.0%) 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 7.9%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 1.3 billion × (1 + 2.0%) ÷ (7.9% to 2.0%) = US $ 23 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 23 billion ÷ (1 + 7.9%)ten= US $ 11 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is US $ 18 billion. In the last step, we divide the equity value by the number of shares outstanding. From the current share price of US $ 64.5, the company looks fairly good value at a 48% discount from the current share price. 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.
NYSE: JBL Discounted Cash Flow December 17, 2021
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. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. 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 view Jabil 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 7.9%, which is based on a leveraged beta of 1.360. 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 from globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
While a business valuation is important, ideally it won’t be the only analysis that you look at for a business. DCF models are not the ultimate solution for investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. What is the reason why the stock price is below intrinsic value? For Jabil, there are three other things you should consider:
- Risks: We think you should evaluate the 1 warning sign for Jabil we reported before making an investment in the business.
- Future benefits: How does JBL’s growth rate compare to its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- 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!
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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