Yahoo Finance Smiths Group plc (LON:SMIN) Investors Are Paying Above The Intrinsic Value
I am going to run you through how I calculated the intrinsic value of Smiths Group plc (LSE:SMIN) using the discounted cash flow (DCF) method. 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 after May 2018 then I highly recommend you check out the latest calculation for Smiths Group here.
What’s the value?
I’ve used the 2-stage growth 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, I took the analyst consensus forecast of SMIN’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.3%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of UK£1.55B. Keen to understand how I calculated this value? Check out our detailed analysis here.
The graph above shows how SMIN’s earnings are expected to move going forward, which should give you an idea of SMIN’s outlook. Then, I calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the steady growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is UK£4.06B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is UK£5.62B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £14.19, which, compared to the current share price of £17.2, we see that Smiths Group is fair value, maybe slightly overvalued at the time of writing.
Next Steps:
Whilst important, DCF calculation 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 SMIN, I’ve put together three important aspects you should look at:
Financial Health: Does SMIN 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 SMIN’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 SMIN? 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 LSE every 6 hours. If you want to find the calculation for other stocks 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.
