Does the share price for Hunting plc (LSE:HTG) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. Also note that this article was written in December 2017 so be sure check the latest calculation for Hunting here.
Crunching the numbers
I will be using 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 begin, I pulled together the analyst consensus estimates of HTG’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.3%. This resulted in a present value of 5-year cash flow of $179.5M. Keen to know how I arrived at this number? Take a look at our detailed analysis here.
The graph above shows how HTG’s top and bottom lines are expected to move going forward, which should give you some color on HTG’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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. Discounting the terminal value back five years gives us a present value of $1,000.7M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $1,180.2M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of £5.35, which, compared to the current share price of £5.485, we see that Hunting is fair value, maybe slightly overvalued at the time of writing.
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 HTG, I’ve compiled three relevant factors you should further research:
PS. Simply Wall St does a DCF calculation for every GB 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.