dormakaba Holding AG (VTX:DOKA) Shares Could Be 50% Below Their Intrinsic Value Estimate

Key Insights

• dormakaba Holding's estimated fair value is CHF1,348 based on 2 Stage Free Cash Flow to Equity
• dormakaba Holding's CHF679 share price signals that it might be 50% undervalued
• The CHF702 analyst price target for DOKA is 48% less than our estimate of fair value

How far off is dormakaba Holding AG (VTX:DOKA) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for dormakaba Holding

Crunching The Numbers

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CHF, Millions)	CHF171.1m	CHF218.1m	CHF251.2m	CHF269.4m	CHF283.3m	CHF293.8m	CHF301.8m	CHF307.7m	CHF312.3m	CHF315.8m
Growth Rate Estimate Source	Analyst x4	Analyst x4	Analyst x3	Est @ 7.26%	Est @ 5.17%	Est @ 3.71%	Est @ 2.69%	Est @ 1.98%	Est @ 1.48%	Est @ 1.13%
Present Value (CHF, Millions) Discounted @ 5.4%	CHF162	CHF196	CHF214	CHF218	CHF217	CHF214	CHF208	CHF201	CHF194	CHF186

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CHF2.0b

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 5-year average of the 10-year government bond yield of 0.3%. We discount the terminal cash flows to today's value at a cost of equity of 5.4%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CHF316m× (1 + 0.3%) ÷ (5.4%– 0.3%) = CHF6.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CHF6.2b÷ ( 1 + 5.4%)¹⁰= CHF3.6b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF5.6b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CHF679, the company appears quite good value at a 50% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The 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 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 dormakaba Holding 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 5.4%, which is based on a levered beta of 1.245. 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 dormakaba Holding

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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 dormakaba Holding, we've put together three essential elements you should assess:

1. Risks: Take risks, for example - dormakaba Holding has 2 warning signs we think you should be aware of.
2. Future Earnings: How does DOKA'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 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 Swiss stock every day, so if you want to find the intrinsic value of any other stock just search here.

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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.