How far off is Diebold Nixdorf Incorporated (NYSE:DBD) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by estimating the company’s future cash flows and discounting them to their present value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of 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 Diebold Nixdorf by following the link below.
See our latest analysis for Diebold Nixdorf
The model
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. In the first stage we need to estimate the cash flows to the business over the next five years. 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 the sum of these cash flows to arrive at a present value estimate.
5-year cash flow forecast
| 2018 | 2019 | 2020 | 2021 | 2022 | |
| Levered FCF ($, Millions) | $53.00 | $160.00 | $196.00 | $219.08 | $244.87 |
| Source | Analyst x1 | Analyst x2 | Analyst x1 | Extrapolated @ (11.77%) | Extrapolated @ (11.77%) |
| Present Value Discounted @ 17.05% | $45.28 | $116.78 | $122.22 | $116.71 | $111.45 |
Present Value of 5-year Cash Flow (PVCF)= US$512.44m
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 17.1%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$244.87m × (1 + 2.9%) ÷ (17.1% – 2.9%) = US$1.79b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$1.79b ÷ ( 1 + 17.1%)5 = US$813.74m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$1.33b. 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 $17.46. Compared to the current share price of $12.25, the stock is about right, perhaps slightly undervalued at a 29.84% discount to what it is available for right now.
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. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Diebold Nixdorf 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 17.1%, 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:
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. What is the reason for the share price to differ from the intrinsic value? For DBD, there are three key aspects you should further examine:
- Financial Health: Does DBD 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.
- Future Earnings: How does DBD’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.
- Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of DBD? 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 US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.