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An Intrinsic Calculation For Compagnie Plastic Omnium SE (EPA:POM) Suggests It's 43% Undervalued
Key Insights
- Compagnie Plastic Omnium's estimated fair value is €28.41 based on 2 Stage Free Cash Flow to Equity
- Compagnie Plastic Omnium is estimated to be 43% undervalued based on current share price of €16.21
- Our fair value estimate is 56% higher than Compagnie Plastic Omnium's analyst price target of €18.25
In this article we are going to estimate the intrinsic value of Compagnie Plastic Omnium SE (EPA:POM) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
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 still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
See our latest analysis for Compagnie Plastic Omnium
Step By Step Through The Calculation
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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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 discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
Levered FCF (€, Millions) | €275.1m | €373.5m | €452.3m | €508.6m | €553.7m | €589.0m | €616.1m | €637.0m | €653.0m | €665.6m |
Growth Rate Estimate Source | Analyst x6 | Analyst x6 | Analyst x3 | Est @ 12.45% | Est @ 8.87% | Est @ 6.36% | Est @ 4.61% | Est @ 3.38% | Est @ 2.52% | Est @ 1.92% |
Present Value (€, Millions) Discounted @ 13% | €243 | €290 | €310 | €308 | €295 | €277 | €256 | €233 | €211 | €189 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €2.6b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 0.5%. We discount the terminal cash flows to today's value at a cost of equity of 13%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = €666m× (1 + 0.5%) ÷ (13%– 0.5%) = €5.2b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= €5.2b÷ ( 1 + 13%)10= €1.5b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is €4.1b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of €16.2, the company appears quite undervalued at a 43% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
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 Compagnie Plastic Omnium 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 13%, which is based on a levered beta of 1.896. 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 Compagnie Plastic Omnium
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings and cashflows.
- Dividends are covered by earnings and cash flows.
- Dividend is low compared to the top 25% of dividend payers in the Auto Components market.
- Annual earnings are forecast to grow faster than the French market.
- Good value based on P/E ratio and estimated fair value.
- Revenue is forecast to grow slower than 20% per year.
Next Steps:
Although the valuation of a company is important, it is only one of many factors that you need to assess 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. Can we work out why the company is trading at a discount to intrinsic value? For Compagnie Plastic Omnium, we've compiled three additional aspects you should consider:
- Risks: For example, we've discovered 2 warning signs for Compagnie Plastic Omnium that you should be aware of before investing here.
- Future Earnings: How does POM'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: 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 ENXTPA every day. If you want to find the calculation for other stocks just search here.
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Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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 ENXTPA:OPM
OPmobility
Engages in the manufacture and sale of exterior vehicle lighting systems, batteries, and electrification systems for electric mobility in Europe, North America, China, rest of Asia, South America, the Middle East, and Africa.
Average dividend payer and fair value.