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Estimating The Fair Value Of Spirit AeroSystems Holdings Inc (NYSE:SPR)

How far off is Spirit AeroSystems Holdings Inc (NYSE:SPR) 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 expected future cash flows and discounting them to today’s 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. 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 June 2018 then I highly recommend you check out the latest calculation for Spirit AeroSystems Holdings by following the link below. See our latest analysis for Spirit AeroSystems Holdings

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)

$576.92

$689.78

$724.57

$746.44

$768.98

Source

Analyst x12

Analyst x13

Analyst x6

Extrapolated @ (3.02%)

Extrapolated @ (3.02%)

Present Value Discounted @ 9.69%

$525.96

$573.31

$549.03

$515.64

$484.29

Present Value of 5-year Cash Flow (PVCF)= US$2.65b

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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 9.7%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$768.98m × (1 + 2.9%) ÷ (9.7% – 2.9%) = US$11.75b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$11.75b ÷ ( 1 + 9.7%)5 = US$7.40b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$10.05b. 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 $88.3. Relative to the current share price of $86, the stock is about right, perhaps slightly undervalued at a 2.60% discount to what it is available for right now.

NYSE:SPR Intrinsic Value June 22nd 18
NYSE:SPR Intrinsic Value June 22nd 18

Important 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 Spirit AeroSystems Holdings 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 9.7%, which is based on a levered beta of 0.956. 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:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.

For SPR, there are three important factors you should further examine:

  1. Financial Health: Does SPR 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 SPR’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 SPR? 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.


To help readers see pass 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.