Calculation of the intrinsic value of Compagnie de Saint-Gobain SA (EPA: SGO)
In this article, we will estimate the intrinsic value of Compagnie de Saint-Gobain SA (EPA: SGO) by taking the company’s future cash flow forecasts and discounting them to their present value. Our analysis will use the Discounted Cash Flow (DCF) model. There really isn’t much to do, although it might seem quite complex.
There are many ways that businesses can be valued, so we would like to stress that a DCF is not perfect for all situations. Anyone interested in learning a little more about intrinsic value should have a read of the Simply Wall St.
Consult our latest analysis for Compagnie de Saint-Gobain
Step by step in the calculation
We use what is called a 2-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. 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 the last published 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 down during this period. We do this to reflect that growth tends to slow down more in the early years than in subsequent years.
Typically, 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) estimate
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Levered FCF (€, million) | € 1.94 billion | 2.26 billion euros | € 2.35 billion | 2.69 billion euros | € 2.60 billion | 2.55 billion euros | 2.51 billion euros | 2.49 billion euros | € 2.48 billion | € 2.48 billion |
Source of estimated growth rate | Analyst x8 | Analyst x9 | Analyst x5 | Analyst x2 | Analyst x1 | Is at -2.09% | Is at -1.34% | Is at -0.81% | Is at -0.44% | Est @ -0.18% |
Present value (€, million) discounted at 8.9% | 1.8 K € | € 1.9K | 1.8 K € | € 1.9K | 1.7 K € | 1.5 K € | 1.4 K € | 1.3 K € | 1.2 K € | 1.1 K € |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = € 16 billion
The second stage is also known as terminal value, it is the cash flow of the business after the first stage. 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 (0.4%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 8.9%.
Terminal value (TV)= FCF_{2030} × (1 + g) ÷ (r – g) = € 2.5 billion × (1 + 0.4%) ÷ (8.9% – 0.4%) = € 29 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= € 29bn ÷ (1 + 8.9%)^{ten}= € 13 billion
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which translates into the total value of equity, which in this case is 28 billion euros. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current stock price of € 53.2, the company appears to be around fair value 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. 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 complete picture of a company’s potential performance. Since we consider Compagnie de Saint-Gobain to be 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 the debt. In this calculation, we used 8.9%, which is based on a leveraged beta of 1.415. 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.
To move on:
While a business valuation is important, it shouldn’t be the only metric you look at when researching a business. The DCF model is not a perfect equity valuation tool. 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. For Compagnie de Saint-Gobain, we have brought together three essential elements to be further explored:
- Risks: You should be aware of the 4 warning signs for the Compagnie de Saint-Gobain we found out before considering an investment in the business.
- Future income: How does SGO’s growth rate compare to its peers and to the market in general? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth forecast chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high quality inventory to get a feel for what you might be missing!
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. 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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