Estimating The Fair Value Of Compass Minerals International Inc (NYSE:CMP)

Does the share price for Compass Minerals International Inc (NYSE:CMP) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by taking the expected future cash flows and discounting them to their present 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. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not July 2018 then I highly recommend you check out the latest calculation for Compass Minerals International by following the link below.

See our latest analysis for Compass Minerals International

The calculation

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. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. 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 estimate

2018 2019 2020 2021 2022
Levered FCF ($, Millions) $88.85 $240.44 $213.37 $220.55 $227.97
Source Analyst x4 Analyst x8 Analyst x3 Extrapolated @ (3.37%) Extrapolated @ (3.37%)
Present Value Discounted @ 12.61% $78.90 $189.60 $149.41 $137.14 $125.88

Present Value of 5-year Cash Flow (PVCF)= US$680.91m

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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 12.6%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$227.97m × (1 + 2.9%) ÷ (12.6% – 2.9%) = US$2.43b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$2.43b ÷ ( 1 + 12.6%)5 = US$1.34b

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 US$2.02b. In the final step we 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) or ADR then we use the equivalent number. This results in an intrinsic value of $59.73. Relative to the current share price of $68.2, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

NYSE:CMP Intrinsic Value Export July 27th 18
NYSE:CMP Intrinsic Value Export July 27th 18

The assumptions

I’d like to 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Compass Minerals International 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 12.6%, which is based on a levered beta of 1.371. 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 CMP, I’ve compiled three pertinent factors you should further examine:

  1. Financial Health: Does CMP 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 CMP’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 CMP? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks 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.