- Commercial Services
An Intrinsic Calculation For DO & CO Aktiengesellschaft (VIE:DOC) Suggests It's 38% Undervalued
- Using the 2 Stage Free Cash Flow to Equity, DO & CO fair value estimate is €161
- DO & CO's €99.50 share price signals that it might be 38% undervalued
- The €128 analyst price target for DOC is 21% less than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of DO & CO Aktiengesellschaft (VIE:DOC) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for DO & CO
Step By Step Through The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher 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 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.
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
|Levered FCF (€, Millions)||€48.0m||€85.4m||€109.1m||€119.6m||€122.7m||€124.9m||€126.7m||€128.1m||€129.3m||€130.3m|
|Growth Rate Estimate Source||Analyst x1||Analyst x2||Analyst x2||Analyst x2||Analyst x1||Est @ 1.81%||Est @ 1.41%||Est @ 1.12%||Est @ 0.92%||Est @ 0.79%|
|Present Value (€, Millions) Discounted @ 7.7%||€44.5||€73.5||€87.2||€88.7||€84.5||€79.8||€75.1||€70.5||€66.1||€61.8|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €732m
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 (0.5%) 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 7.7%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = €130m× (1 + 0.5%) ÷ (7.7%– 0.5%) = €1.8b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €1.8b÷ ( 1 + 7.7%)10= €852m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €1.6b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of €99.5, the company appears quite good value at a 38% 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.
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 DO & CO 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 7.7%, which is based on a levered beta of 1.099. 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 DO & CO
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings.
- No major weaknesses identified for DOC.
- Annual earnings are forecast to grow faster than the Austrian market.
- Trading below our estimate of fair value by more than 20%.
- Debt is not well covered by operating cash flow.
- Revenue is forecast to grow slower than 20% per year.
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For DO & CO, there are three important aspects you should consider:
- Risks: For example, we've discovered 1 warning sign for DO & CO that you should be aware of before investing here.
- Future Earnings: How does DOC'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 Austrian stock every day, so if you want to find the intrinsic value of any other stock just search here.
Valuation is complex, but we're helping make it simple.
Find out whether DO & CO 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.View the Free Analysis
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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.
DO & CO
DO & CO Aktiengesellschaft provides catering services in Austria, Turkey, Great Britain, the United States, Spain, Germany, and internationally.
High growth potential with acceptable track record.