Is Gurit Holding AG (VTX:GURN) Trading At A 38% Discount?

Key Insights

• Gurit Holding's estimated fair value is CHF58.33 based on 2 Stage Free Cash Flow to Equity
• Current share price of CHF36.40 suggests Gurit Holding is potentially 38% undervalued
• Analyst price target for GURN is CHF54.67 which is 6.3% below our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Gurit Holding AG (VTX:GURN) as an investment opportunity 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. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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 Gurit Holding

What's The Estimated Valuation?

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

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (CHF, Millions)	CHF13.0m	CHF16.0m	CHF14.9m	CHF14.1m	CHF13.7m	CHF13.3m	CHF13.1m	CHF13.0m	CHF12.9m	CHF12.9m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ -7.13%	Est @ -4.92%	Est @ -3.37%	Est @ -2.28%	Est @ -1.52%	Est @ -0.99%	Est @ -0.62%	Est @ -0.36%
Present Value (CHF, Millions) Discounted @ 5.0%	CHF12.4	CHF14.5	CHF12.8	CHF11.6	CHF10.7	CHF9.9	CHF9.3	CHF8.8	CHF8.3	CHF7.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CHF106m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 (0.3%) 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 5.0%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = CHF13m× (1 + 0.3%) ÷ (5.0%– 0.3%) = CHF271m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CHF271m÷ ( 1 + 5.0%)¹⁰= CHF166m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF273m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of CHF36.4, the company appears quite undervalued 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.

Important Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Gurit 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 5.0%, which is based on a levered beta of 1.155. 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 Gurit Holding

Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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. Why is the intrinsic value higher than the current share price? For Gurit Holding, there are three essential elements you should assess:

1. Risks: We feel that you should assess the 2 warning signs for Gurit Holding we've flagged before making an investment in the company.
2. Future Earnings: How does GURN'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. 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.