Stock Analysis

Estimating The Intrinsic Value Of Bayerische Motoren Werke Aktiengesellschaft (ETR:BMW)

XTRA:BMW
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Key Insights

  • The projected fair value for Bayerische Motoren Werke is €92.52 based on 2 Stage Free Cash Flow to Equity
  • With €108 share price, Bayerische Motoren Werke appears to be trading close to its estimated fair value
  • The €111 analyst price target for BMW is 19% more than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Bayerische Motoren Werke Aktiengesellschaft ( ETR:BMW ) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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 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 Bayerische Motoren Werke

Step By Step Through The Calculation

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 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.

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) forecast

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF (€, Millions) €7.19b €7.32b €8.14b €8.26b €6.94b €6.88b €6.84b €6.82b €6.81b €6.81b
Growth Rate Estimate Source Analyst x10 Analyst x10 Analyst x7 Analyst x2 Analyst x1 Est @ -0.87% Est @ -0.54% Est @ -0.30% Est @ -0.14% Est @ -0.03%
Present Value (€, Millions) Discounted @ 12% €6.4k €5.8k €5.8k €5.2k €3.9k €3.5k €3.1k €2.7k €2.4k €2.2k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €41b

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 (0.2%) 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 12%.

Terminal Value (TV) = FCF 2032 × (1 + g) ÷ (r – g) = €6.8b× (1 + 0.2%) ÷ (12%– 0.2%) = €57b

Present Value of Terminal Value (PVTV) = TV / (1 + r) 10 = €57b÷ ( 1 + 12%) 10 = €18b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €59b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of €108, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf
XTRA:BMW Discounted Cash Flow June 12th 2023

The 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. 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 Bayerische Motoren Werke 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 12%, 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 Bayerische Motoren Werke

Strength
  • Debt is well covered by earnings and cashflows.
  • Dividends are covered by earnings and cash flows.
  • Dividend is in the top 25% of dividend payers in the market.
Weakness
  • Earnings declined over the past year.
Opportunity
  • Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
  • Annual earnings are forecast to decline for the next 3 years.

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. 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. For Bayerische Motoren Werke, we've compiled three further aspects you should explore:

  1. Risks : For instance, we've identified 4 warning signs for Bayerische Motoren Werke (1 is a bit unpleasant) you should be aware of.
  2. Future Earnings : How does BMW'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the XTRA every day. If you want to find the calculation for other stocks just search here .

Valuation is complex, but we're here to simplify it.

Discover if Bayerische Motoren Werke 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.