Estimating The Fair Value Of Altice NV. (AMS:ATC)

I am going to run you through how I calculated the intrinsic value of Altice NV. (ENXTAM:ATC) 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 April 2018 so be sure check out the updated calculation by following the link below. View our latest analysis for Altice

Is ATC fairly valued?

I’m 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 perpetual stable growth rate. 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

2018 2019 2020 2021 2022
Levered FCF (€, Millions) €1,172.28 €1,932.10 €2,494.75 €3,346.00 €3,550.00
Source Analyst x5 Analyst x6 Analyst x4 Analyst x1 Analyst x1
Present Value Discounted @ 19.29% €982.71 €1,357.75 €1,469.65 €1,652.38 €1,469.63

Present Value of 5-year Cash Flow (PVCF)= €6,932

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 (0.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 19.3%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = €3,550 × (1 + 0.7%) ÷ (19.3% – 0.7%) = €19,242

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = €19,242 / ( 1 + 19.3%)5 = €7,966

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €14,898. 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 €9.85, which, compared to the current share price of €8.26, we find that Altice is about right, perhaps slightly undervalued at a 16.12% discount to what it is available for right now.

ENXTAM:ATC Intrinsic Value Apr 26th 18
ENXTAM:ATC Intrinsic Value Apr 26th 18

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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Altice 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 19.3%, which is based on a levered beta of 2. 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For ATC, I’ve put together three important aspects you should further research:

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