Calculating the intrinsic value of Oshkosh Corporation (OSK)

How far off is Oshkosh (NYSE:OSK) to its intrinsic value? I am going to take a look now using a method called discounted cash flow or DCF. Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity by taking the expected Future Cash Flows and discounting them to their present valye. Don’t get put off by the jargon, the math behind it is actually quite straightforward.

If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model.

Please also note that this article was written in January 2017 so be sure check out the updated calculation by following the link below. Check out our latest analysis for Oshkosh

We are going to use a two stage model that takes into account two stages of growth. The first stage may have a high growth rate and the second stage is usually assumed to have a stable growth rate. To start off with we need to estimate the next 5 years of cash flows, where possible I use analysts estimates but when these aren’t available I have extrapolated the previous Free Cash Flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past 5 years, but capped to a reasonable level. The sum of these cash flows is then discounted to today’s value. NYSE-OSK-intrinsic-value-Wed-Jan-11-2017

Step by step through the calculation

Note the numbers here are in millions apart from the per share values.

5-year cash flow estimate

2017 2018 2019 2020 2021
Levered FCF (USD, Millions) $50.15 $430.50 $374.53 $469.00 $436.03
Source Analyst x4 Analyst x8 Analyst x3 Analyst x1 Extrapolated @ (-7.03%)
Present Value Discounted @ 8.89% $46.05 $363.05 $290.06 $333.55 $284.77

Present value of next 5 years cash flows: $1,317

The 2nd stage is also known as Terminal Value, this is the cash flows to the business after the 1st stage. The Perpetuity Method (Gordon Formula) is used to calculate Terminal Value at an annual growth rate equal to the 10 year government bond rate of (1.8%).

Terminal Value

Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)

Terminal Value = $436 × (1 + 1.8%) ÷ (8.9% – 1.8%)

Terminal value based on the Perpetuity Method where growth (g) = 1.8%: $6,210

Present value of terminal value: $4,056

The total value or equity value is then the sum of of the present value of the cash flows.

Equity Value

Equity Value (Total value) = Present value of next 5 years cash flows + terminal value = $1,317 + $4,056 = $5,374

To get the intrinsic value we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR to get the intrinsic value per share.

Value = Total value / Shares Outstanding ($5,373.57 / 74.57)

Value per share: $72.06

Now when we compare the intrinsic value of 72.06 to the current share price of $66.32 we see Oshkosh (NYSE:OSK) is a touch undervalued at a 8% discount to what it is available for right now.

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Oshkosh as potential investors the Cost of Equity is used as the discount rate, not the Cost of Capital (or Weighed Average Cost of Capital/ WACC) which accounts for debt.

In this calculation I’ve used 8.9% and this is based on a Levered Beta of 0.866. I’m not going to go into how I calculate the Levered Beta in detail, I used the ‘Bottom up Beta’ method based on the comparable businesses, I also impose a limit between 0.8 and 2 which is a reasonable range for a stable business. Google this if you want to learn more.

Final Words

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. Is Oshkosh in a healthy financial condition? What is the reason for the share price to differ from the intrinsic value? See our latest FREE analysis to find out!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for another other stock just search here.