Does the April share price for Atresmedia Corporación de Medios de Comunicación, S.A. (BME:A3M) reflect what it’s really worth? Today, we will estimate the stock’s intrinsic value by projecting its future cash flows and then discounting them to today’s value. I will use the Discounted Cash Flow (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward.
Remember though, that there are many ways to estimate a company’s value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Is Atresmedia Corporación de Medios de Comunicación fairly valued?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) estimate
|Levered FCF (€, Millions)||€94.3m||€100.4m||€87.6m||€78.0m||€74.3m||€72.0m||€70.5m||€69.5m||€69.0m||€68.6m|
|Growth Rate Estimate Source||Analyst x9||Analyst x9||Analyst x6||Analyst x1||Est @ -4.68%||Est @ -3.16%||Est @ -2.09%||Est @ -1.35%||Est @ -0.83%||Est @ -0.46%|
|Present Value (€, Millions) Discounted @ 7.4%||€87.8||€87.1||€70.8||€58.7||€52.2||€47.0||€42.9||€39.4||€36.4||€33.8|
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €556m
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 0.4%. We discount the terminal cash flows to today’s value at a cost of equity of 7.4%.
Terminal Value (TV)= FCF2029 × (1 + g) ÷ (r – g) = €69m× (1 + 0.4%) ÷ 7.4%– 0.4%) = €990m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €990m÷ ( 1 + 7.4%)10= €487m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €1.0b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €2.5, the company appears quite good value at a 46% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
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 these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at Atresmedia Corporación de Medios de Comunicación 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 accounts for debt. In this calculation we’ve used 7.4%, which is based on a levered beta of 0.933. Beta is a measure of a stock’s volatility, compared 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.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/overvalued?” If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price to differ from the intrinsic value? For Atresmedia Corporación de Medios de Comunicación, We’ve compiled three relevant factors you should further examine:
- Risks: For example, we’ve discovered 3 warning signs for Atresmedia Corporación de Medios de Comunicación (1 is potentially serious!) that you should be aware of before investing here.
- Future Earnings: How does A3M’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every ES stock every day, so if you want to find the intrinsic value of any other stock just search here.
If you spot an error that warrants correction, please contact the editor at email@example.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.
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