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- SNSE:CMPC
Estimating The Intrinsic Value Of Empresas CMPC S.A. (SNSE:CMPC)
Key Insights
- Empresas CMPC's estimated fair value is CL$1,640 based on 2 Stage Free Cash Flow to Equity
- Empresas CMPC's CL$1,515 share price indicates it is trading at similar levels as its fair value estimate
- Analyst price target for CMPC is US$2,177, which is 33% above our fair value estimate
Does the August share price for Empresas CMPC S.A. (SNSE:CMPC) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Check out our latest analysis for Empresas CMPC
The Model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF ($, Millions) | US$705.5m | US$680.0m | US$530.0m | US$599.0m | US$577.5m | US$572.4m | US$578.3m | US$591.9m | US$611.3m | US$635.3m |
Growth Rate Estimate Source | Analyst x2 | Analyst x2 | Analyst x1 | Analyst x1 | Est @ -3.59% | Est @ -0.88% | Est @ 1.02% | Est @ 2.35% | Est @ 3.28% | Est @ 3.93% |
Present Value ($, Millions) Discounted @ 16% | US$610 | US$508 | US$342 | US$334 | US$278 | US$238 | US$208 | US$184 | US$164 | US$147 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$3.0b
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 5.5%. We discount the terminal cash flows to today's value at a cost of equity of 16%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$635m× (1 + 5.5%) ÷ (16%– 5.5%) = US$6.5b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$6.5b÷ ( 1 + 16%)10= US$1.5b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$4.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CL$1.5k, the company appears about fair value at a 7.6% 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
Now 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 Empresas CMPC 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 16%, which is based on a levered beta of 2.000. 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 Empresas CMPC
- Dividends are covered by earnings and cash flows.
- Earnings declined over the past year.
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Forestry market.
- Annual revenue is forecast to grow faster than the Chilean market.
- Current share price is below our estimate of fair value.
- Debt is not well covered by operating cash flow.
- Annual earnings are forecast to grow slower than the Chilean market.
Next Steps:
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Empresas CMPC, we've put together three relevant elements you should assess:
- Risks: For example, we've discovered 5 warning signs for Empresas CMPC (1 shouldn't be ignored!) that you should be aware of before investing here.
- Future Earnings: How does CMPC'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. Simply Wall St updates its DCF calculation for every Chilean 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 here to simplify it.
Discover if Empresas CMPC might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About SNSE:CMPC
Empresas CMPC
Engages in the production and sale of pulp and wood products in Chile and internationally.
Moderate average dividend payer.