Stock Analysis

Andritz AG (VIE:ANDR) Shares Could Be 46% Below Their Intrinsic Value Estimate

WBAG:ANDR
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Andritz fair value estimate is €105
  • Current share price of €56.30 suggests Andritz is potentially 46% undervalued
  • The €74.96 analyst price target for ANDR is 28% less than our estimate of fair value

Does the April share price for Andritz AG (VIE:ANDR) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Andritz

The Method

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (€, Millions) €463.1m €592.2m €640.2m €611.3m €633.8m €642.5m €650.4m €657.9m €665.1m €672.0m
Growth Rate Estimate Source Analyst x3 Analyst x4 Analyst x3 Analyst x2 Analyst x2 Est @ 1.37% Est @ 1.24% Est @ 1.15% Est @ 1.09% Est @ 1.04%
Present Value (€, Millions) Discounted @ 6.8% €434 €519 €526 €470 €456 €433 €411 €389 €368 €349

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €4.4b

We now need to calculate the Terminal Value, which accounts for all the 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 have used the 5-year average of the 10-year government bond yield (0.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.8%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = €672m× (1 + 0.9%) ÷ (6.8%– 0.9%) = €12b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €12b÷ ( 1 + 6.8%)10= €6.0b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €10b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of €56.3, the company appears quite good value at a 46% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
WBAG:ANDR Discounted Cash Flow April 20th 2024

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Andritz 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 6.8%, which is based on a levered beta of 1.128. 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.

SWOT Analysis for Andritz

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is not viewed as a risk.
Weakness
  • Earnings growth over the past year is below its 5-year average.
  • Dividend is low compared to the top 25% of dividend payers in the Machinery market.
Opportunity
  • Annual earnings are forecast to grow faster than the Austrian market.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • Dividends are not covered by cash flow.
  • Revenue is forecast to grow slower than 20% per year.

Moving On:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or 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 sitting below the intrinsic value? For Andritz, we've put together three relevant aspects you should further examine:

  1. Risks: Take risks, for example - Andritz has 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.
  2. Future Earnings: How does ANDR'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.
  3. Other Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the WBAG every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we're helping make it simple.

Find out whether Andritz is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

About WBAG:ANDR

Andritz

Provides plants, equipment, and services for pulp and paper industry, metalworking and steel industries, hydropower stations, and solid/liquid separation in the municipal and industrial sectors in Europe, North America, South America, China, Asia, and internationally.

Flawless balance sheet with solid track record and pays a dividend.