A Look At The Intrinsic Value Of Telefónica Deutschland Holding AG (FRA:O2D)

How far off is Telefónica Deutschland Holding AG (FRA:O2D) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by estimating the company’s future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not June 2018 then I highly recommend you check out the latest calculation for Telefónica Deutschland Holding by following the link below. View out our latest analysis for Telefónica Deutschland Holding

Step by step through the calculation

I’m 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 perpetual stable growth rate. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

2018 2019 2020 2021 2022
Levered FCF (€, Millions) €802.78 €814.95 €849.49 €861.33 €910.50
Source Analyst x15 Analyst x15 Analyst x11 Analyst x3 Analyst x2
Present Value Discounted @ 8.11% €742.57 €697.29 €672.33 €630.57 €616.57

Present Value of 5-year Cash Flow (PVCF)= €3.36b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 0.5%. We discount this to today’s value at a cost of equity of 8.1%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €910.50m × (1 + 0.5%) ÷ (8.1% – 0.5%) = €12.10b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €12.10b ÷ ( 1 + 8.1%)5 = €8.19b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is €11.55b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of €3.88. Relative to the current share price of €3.53, the stock is about right, perhaps slightly undervalued at a 9.08% discount to what it is available for right now.

DB:O2D Intrinsic Value June 25th 18
DB:O2D Intrinsic Value June 25th 18

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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Telefónica Deutschland Holding as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.1%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For O2D, there are three key aspects you should further examine:

  1. Financial Health: Does O2D have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does O2D’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: Are there other high quality stocks you could be holding instead of O2D? 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 does a DCF calculation for every DE stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.