Stock Analysis

# Estimating The Intrinsic Value Of Telecom Italia S.p.A. (BIT:TIT)

•  Updated

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Does the February share price for Telecom Italia S.p.A. (BIT:TIT) reflect it's really worth? Today, I will calculate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's 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. Please also note that this article was written in February 2019 so be sure check out the updated calculation by following the link below.

See our latest analysis for Telecom Italia

### The model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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. I then discount this to its value today and sum up the total to get the present value of these cash flows.

#### 5-year cash flow forecast

 2019 2020 2021 2022 2023 Levered FCF (€, Millions) €1.49k €1.79k €2.73k €1.96k €1.51k Source Analyst x6 Analyst x6 Analyst x2 Analyst x2 Analyst x1 Present Value Discounted @ 14.95% €1.30k €1.36k €1.79k €1.12k €752.03

Present Value of 5-year Cash Flow (PVCF)= €6.3b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. 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 (2.9%). In the same way as with the 5-year 'growth' period, we discount this to today's value at a cost of equity of 14.9%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = €1.5b × (1 + 2.9%) ÷ (14.9% – 2.9%) = €13b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €13b ÷ ( 1 + 14.9%)5 = €6.4b

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 €13b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of €0.61. Relative to the current share price of €0.49, the stock is about right, perhaps slightly undervalued at a 19% discount to what it is available for right now.

### 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 Telecom Italia 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 14.9%, which is based on a levered beta of 1.7. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. For TIT, I've compiled three relevant aspects you should further examine:

1. Financial Health: Does TIT 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 TIT'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 TIT? 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 IT stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article 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.

### About BIT:TIT

#### Telecom Italia

Telecom Italia S.p.A., together with its subsidiaries, provides fixed and mobile telecommunications services in Italy and internationally.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Valuation5
Future Growth4
Past Performance0
Financial Health0
Dividends0

Read more about these checks in the individual report sections or in our analysis model.

Undervalued with reasonable growth potential.