- Electronic Equipment and Components
Barco NV (EBR:BAR) Shares Could Be 30% Above Their Intrinsic Value Estimate
- The projected fair value for Barco is €20.32 based on 2 Stage Free Cash Flow to Equity
- Barco's €26.36 share price signals that it might be 30% overvalued
- When compared to theindustry average discount of -50%, Barco's competitors seem to be trading at a greater premium to fair value
In this article we are going to estimate the intrinsic value of Barco NV (EBR:BAR) by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Check out our latest analysis for Barco
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 begin with, we have to get estimates of 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 need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
|Levered FCF (€, Millions)||€140.0m||€140.0m||€142.0m||€143.8m||€145.7m||€147.6m||€149.4m||€151.4m||€153.3m||€155.2m|
|Growth Rate Estimate Source||Analyst x1||Analyst x1||Analyst x1||Est @ 1.30%||Est @ 1.29%||Est @ 1.28%||Est @ 1.28%||Est @ 1.28%||Est @ 1.27%||Est @ 1.27%|
|Present Value (€, Millions) Discounted @ 8.8%||€129||€118||€110||€103||€95.5||€88.9||€82.8||€77.0||€71.7||€66.7|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €942m
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 (1.3%) 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 8.8%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = €155m× (1 + 1.3%) ÷ (8.8%– 1.3%) = €2.1b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €2.1b÷ ( 1 + 8.8%)10= €896m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €1.8b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of €26.4, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Barco 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 8.8%, which is based on a levered beta of 1.082. 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 Barco
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividend is low compared to the top 25% of dividend payers in the Electronic market.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the Belgian market.
- Dividends are not covered by cash flow.
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. Can we work out why the company is trading at a premium to intrinsic value? For Barco, there are three additional items you should consider:
- Financial Health: Does BAR have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future Earnings: How does BAR'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 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 ENXTBR 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 Barco 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.
Barco NV, together with its subsidiaries, develops visualization solutions for the entertainment, enterprise, and healthcare markets in Belgium and internationally.
Flawless balance sheet with proven track record.