Calculating The Fair Value Of Compagnie de Saint-Gobain S.A. (EPA:SGO)

Key Insights

• The projected fair value for Compagnie de Saint-Gobain is €89.78 based on 2 Stage Free Cash Flow to Equity
• With €97.00 share price, Compagnie de Saint-Gobain appears to be trading close to its estimated fair value
• When compared to theindustry average discount of -6.9%, Compagnie de Saint-Gobain's competitors seem to be trading at a lesser premium to fair value

Does the July share price for Compagnie de Saint-Gobain S.A. (EPA:SGO) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present 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.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

The Model

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. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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, 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

	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035
Levered FCF (€, Millions)	€3.44b	€3.31b	€3.23b	€3.20b	€3.20b	€3.21b	€3.24b	€3.27b	€3.31b	€3.36b
Growth Rate Estimate Source	Est @ -6.27%	Est @ -3.86%	Est @ -2.18%	Est @ -1.00%	Est @ -0.17%	Est @ 0.41%	Est @ 0.82%	Est @ 1.10%	Est @ 1.30%	Est @ 1.44%
Present Value (€, Millions) Discounted @ 8.4%	€3.2k	€2.8k	€2.5k	€2.3k	€2.1k	€2.0k	€1.8k	€1.7k	€1.6k	€1.5k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €22b

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. 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 (1.8%) 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 8.4%.

Terminal Value (TV)= FCF₂₀₃₅ × (1 + g) ÷ (r – g) = €3.4b× (1 + 1.8%) ÷ (8.4%– 1.8%) = €52b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €52b÷ ( 1 + 8.4%)¹⁰= €23b

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 €45b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €97.0, 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.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 de Saint-Gobain 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 8.4%, which is based on a levered beta of 1.286. 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.

View our latest analysis for Compagnie de Saint-Gobain

Moving On:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching 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 example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Compagnie de Saint-Gobain, we've compiled three important elements you should look at:

1. Risks: Take risks, for example - Compagnie de Saint-Gobain has 1 warning sign we think you should be aware of.
2. Future Earnings: How does SGO'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. Simply Wall St updates its DCF calculation for every French stock every day, so if you want to find the intrinsic value of any other stock just search here.

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.