How far off is FMC Corporation 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 taking the foreast future cash flows of the company and discounting them back to today’s value. I will use 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. Please also note that this article was written in November 2018 so be sure check out the updated calculation by following the link below.
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. 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
|Levered FCF ($, Millions)||$1.23k||$838.98||$899.00||$1.05k||$1.04k|
|Source||Analyst x5||Analyst x4||Analyst x2||Analyst x1||Est @ -0.71%|
|Present Value Discounted @ 11.7%||$1.10k||$672.40||$645.03||$673.16||$598.39|
Present Value of 5-year Cash Flow (PVCF)= US$3.7b
After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond 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 11.7%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$1.0b × (1 + 2.9%) ÷ (11.7% – 2.9%) = US$12b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$12b ÷ ( 1 + 11.7%)5 = US$7.0b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$11b. 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 $79.69. Compared to the current share price of $79.68, the stock is about right, perhaps slightly undervalued at a 0.01% discount to what it is available for right now.
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 FMC 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 11.7%, which is based on a levered beta of 1.241. 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.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For FMC, I’ve compiled three important factors you should look at:
- Financial Health: Does FMC 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 FMC’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 FMC? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!