Calculating The Intrinsic Value Of Tutor Perini Corporation (NYSE:TPC)

Key Insights

• The projected fair value for Tutor Perini is US$6.35 based on 2 Stage Free Cash Flow to Equity
• Current share price of US$7.15 suggests Tutor Perini is potentially trading close to its fair value
• Tutor Perini's peers seem to be trading at a higher premium to fair value based onthe industry average of -42%

Today we will run through one way of estimating the intrinsic value of Tutor Perini Corporation (NYSE:TPC) by taking the expected future cash flows and discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Tutor Perini

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. To begin with, we have to get estimates of 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, 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)	US$53.3m	US$47.3m	US$43.9m	US$41.9m	US$40.9m	US$40.4m	US$40.4m	US$40.6m	US$41.0m	US$41.6m
Growth Rate Estimate Source	Est @ -16.97%	Est @ -11.25%	Est @ -7.24%	Est @ -4.43%	Est @ -2.47%	Est @ -1.10%	Est @ -0.13%	Est @ 0.54%	Est @ 1.01%	Est @ 1.34%
Present Value ($, Millions) Discounted @ 14%	US$46.8	US$36.4	US$29.6	US$24.8	US$21.3	US$18.4	US$16.2	US$14.2	US$12.6	US$11.2

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$232m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 14%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$42m× (1 + 2.1%) ÷ (14%– 2.1%) = US$357m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$357m÷ ( 1 + 14%)¹⁰= US$96m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$328m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$7.2, 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.

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. 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 Tutor Perini 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 14%, 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.

Next Steps:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. For Tutor Perini, we've put together three relevant items you should further examine:

1. Risks: For example, we've discovered 1 warning sign for Tutor Perini that you should be aware of before investing here.
2. Future Earnings: How does TPC'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. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock 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.