Stock Analysis

Is There An Opportunity With Schweiter Technologies AG's (VTX:SWTQ) 40% Undervaluation?

SWX:SWTQ
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Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Schweiter Technologies fair value estimate is CHF994
  • Schweiter Technologies' CHF600 share price signals that it might be 40% undervalued
  • The CHF774 analyst price target for SWTQ is 22% less than our estimate of fair value

Does the September share price for Schweiter Technologies AG (VTX:SWTQ) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Check out our latest analysis for Schweiter Technologies

Step By Step Through The Calculation

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.

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

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (CHF, Millions) CHF44.1m CHF66.9m CHF74.0m CHF78.8m CHF82.4m CHF85.1m CHF87.0m CHF88.4m CHF89.3m CHF90.0m
Growth Rate Estimate Source Analyst x3 Analyst x3 Analyst x1 Est @ 6.53% Est @ 4.57% Est @ 3.20% Est @ 2.25% Est @ 1.58% Est @ 1.11% Est @ 0.78%
Present Value (CHF, Millions) Discounted @ 5.9% CHF41.7 CHF59.6 CHF62.3 CHF62.6 CHF61.8 CHF60.2 CHF58.2 CHF55.8 CHF53.2 CHF50.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CHF566m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 0.01%. We discount the terminal cash flows to today's value at a cost of equity of 5.9%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CHF90m× (1 + 0.01%) ÷ (5.9%– 0.01%) = CHF1.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CHF1.5b÷ ( 1 + 5.9%)10= CHF857m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is CHF1.4b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CHF600, the company appears quite undervalued at a 40% 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.

dcf
SWX:SWTQ Discounted Cash Flow September 8th 2023

Important Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual 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 Schweiter Technologies 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 5.9%, which is based on a levered beta of 1.182. 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 Schweiter Technologies

Strength
  • Debt is not viewed as a risk.
Weakness
  • Earnings declined over the past year.
  • Dividend is low compared to the top 25% of dividend payers in the Building market.
Opportunity
  • Annual earnings are forecast to grow faster than the Swiss market.
  • Trading below our estimate of fair value by more than 20%.
Threat
  • Dividends are not covered by earnings.
  • Annual revenue is forecast to grow slower than the Swiss market.

Moving On:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Schweiter Technologies, we've compiled three fundamental aspects you should look at:

  1. Risks: As an example, we've found 2 warning signs for Schweiter Technologies that you need to consider before investing here.
  2. Future Earnings: How does SWTQ'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 SWX every day. If you want to find the calculation for other stocks just search here.

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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.