Does the 33% undervaluation of Dassault Aviation SA (EPA:AM) present an opportunity?

0

Does the February price of Dassault Aviation SA (EPA:AM) share reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model for this purpose. Patterns like these may seem beyond a layman’s comprehension, but they’re pretty easy to follow.

Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something that interests you.

Discover our latest analysis for Dassault Aviation

The method

We use what is called a 2-step model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.

Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:

Estimated free cash flow (FCF) over 10 years

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leveraged FCF (€, Millions) €1.29 billion €291.7 million €605.7 million €592.0m €583.9 million €578.9 million €576.0m €574.6m €574.2 million €574.5 million
Growth rate estimate Source Analyst x6 Analyst x6 Analyst x3 Analyst x1 Is @ -1.37% Is @ -0.86% Is @ -0.5% Is @ -0.25% East @ -0.07% Is 0.05%
Present value (€, millions) discounted at 4.7% €1.2k 266 € 527 € 492 € 463 € 438 € 416 € 396 € 378 € 361 €

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = €5.0 billion

We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (0.3%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 4.7%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = €575m × (1 + 0.3%) ÷ (4.7%– 0.3%) = €13bn

Present value of terminal value (PVTV)= TV / (1 + r)ten= €13 billion÷ ( 1 + 4.7%)ten= €8.2 billion

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is 13 billion euros. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of €106, the company looks quite undervalued at a 33% discount to the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.

ENXTPA:AM Cash Flow Update February 5, 2022

The hypotheses

Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. If you disagree with these results, try the math yourself and play around with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Dassault Aviation as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 4.7%, which is based on a leveraged beta of 0.918. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Let’s move on :

Although the valuation of a business is important, it will ideally not be the only piece of analysis you will look at for a business. DCF models are not the be-all and end-all of investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. Why is intrinsic value higher than the current stock price? For Dassault Aviation, there are three additional aspects that you need to deepen:

  1. Risks: We believe that you should evaluate the 1 warning sign for Dassault Aviation we reported before investing in the company.
  2. Future earnings: How does AM’s growth rate compare to its peers and the broader market? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
  3. Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!

PS. The Simply Wall St app performs an updated cash flow assessment for each ENXTPA stock every day. If you want to find the calculation for other stocks, search here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Share.

Comments are closed.