Is QTCOM fairly valued?
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To start off with we need to estimate the next five years of cash flows. 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 forecast
|Levered FCF (€, Millions)||€-0.50||€1.70||€8.00||€11.05||€13.70|
|Source||Analyst x1||Analyst x2||Analyst x2||Analyst x2||Analyst x2|
|Present Value Discounted @ 8.15%||€-0.46||€1.45||€6.32||€8.08||€9.26|
Present Value of 5-year Cash Flow (PVCF)= €25
After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (0.8%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.2%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €14 × (1 + 0.8%) ÷ (8.2% – 0.8%) = €187
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €187 / ( 1 + 8.2%)5 = €126
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €151. The last step is to then 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) then we use the equivalent number. This results in an intrinsic value of €6.35, which, compared to the current share price of €5.94, we find that Qt Group Oyj is about right, perhaps slightly undervalued at a 6.44% discount to what it is available for right now.
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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Qt Group Oyj 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 8.2%, which is based on a levered beta of 0.8. 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.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For QTCOM, there are three essential aspects you should further examine:
- Financial Health: Does QTCOM 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.
- Future Earnings: How does QTCOM’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of QTCOM? 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 FI stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.