A Look At The Intrinsic Value Of Alpha Metallurgical Resources, Inc. (NYSE:AMR)

By
Simply Wall St
Published
September 23, 2021
NYSE:AMR
Source: Shutterstock

In this article we are going to estimate the intrinsic value of Alpha Metallurgical Resources, Inc. (NYSE:AMR) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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 Alpha Metallurgical Resources

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 ten years of cash flows. 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, 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

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Levered FCF ($, Millions) US$186.7m US$114.3m US$79.5m US$63.1m US$54.3m US$49.3m US$46.5m US$44.9m US$44.1m US$43.8m
Growth Rate Estimate Source Analyst x2 Analyst x2 Est @ -30.41% Est @ -20.69% Est @ -13.89% Est @ -9.12% Est @ -5.79% Est @ -3.46% Est @ -1.82% Est @ -0.68%
Present Value ($, Millions) Discounted @ 8.5% US$172 US$97.1 US$62.3 US$45.5 US$36.1 US$30.3 US$26.3 US$23.4 US$21.2 US$19.4

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$533m

The second stage is also known as Terminal Value, this is the business's cash flow after 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 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 8.5%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US$44m× (1 + 2.0%) ÷ (8.5%– 2.0%) = US$687m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$687m÷ ( 1 + 8.5%)10= US$304m

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 US$837m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$49.2, 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.

dcf
NYSE:AMR Discounted Cash Flow September 24th 2021

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Alpha Metallurgical Resources 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 8.5%, which is based on a levered beta of 1.376. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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 Alpha Metallurgical Resources, we've put together three important factors you should look at:

  1. Risks: For instance, we've identified 3 warning signs for Alpha Metallurgical Resources that you should be aware of.
  2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for AMR's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  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 American stock every day, so if you want to find the intrinsic value of any other stock just search here.

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