Calculating The Fair Value Of Aston Martin Lagonda Global Holdings plc (LON:AML)

Key Insights

• The projected fair value for Aston Martin Lagonda Global Holdings is UK£2.49 based on 2 Stage Free Cash Flow to Equity
• Current share price of UK£2.68 suggests Aston Martin Lagonda Global Holdings is potentially trading close to its fair value
• Analyst price target for AML is UK£4.04, which is 63% above our fair value estimate

Today we will run through one way of estimating the intrinsic value of Aston Martin Lagonda Global Holdings plc (LON:AML) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for Aston Martin Lagonda Global Holdings

Step By Step Through The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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.

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) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (£, Millions)	-UK£26.8m	UK£67.2m	UK£111.5m	UK£163.6m	UK£217.8m	UK£269.1m	UK£314.7m	UK£353.3m	UK£385.1m	UK£410.9m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ 66.11%	Est @ 46.69%	Est @ 33.10%	Est @ 23.58%	Est @ 16.92%	Est @ 12.26%	Est @ 9.00%	Est @ 6.71%
Present Value (£, Millions) Discounted @ 13%	-UK£23.7	UK£52.4	UK£76.9	UK£99.6	UK£117	UK£128	UK£132	UK£131	UK£126	UK£119

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£959m

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 1.4%. We discount the terminal cash flows to today's value at a cost of equity of 13%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = UK£411m× (1 + 1.4%) ÷ (13%– 1.4%) = UK£3.5b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£3.5b÷ ( 1 + 13%)¹⁰= UK£1.0b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£2.0b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of UK£2.7, the company appears around fair value at the time of writing. 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.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Aston Martin Lagonda Global Holdings 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 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 Aston Martin Lagonda Global Holdings

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 Aston Martin Lagonda Global Holdings, there are three additional aspects you should look at:

1. Risks: Be aware that Aston Martin Lagonda Global Holdings is showing 2 warning signs in our investment analysis , and 1 of those is a bit unpleasant...
2. Future Earnings: How does AML'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the LSE every day. If you want to find the calculation for other stocks just search here.

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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.