In this article I am going to calculate the intrinsic value of Valmont Industries Inc (NYSE:VMI) using the discounted cash flows (DCF) model. 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. If you are reading this after December 2017 then I highly recommend you check out the latest calculation for Valmont Industries here.
Is VMI fairly valued?
We are going to use a two-stage DCF model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I took the analyst consensus estimates of VMI’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.49%. This resulted in a present value of 5-year cash flow of $791.8M. Want to know how I arrived at this number? Read our detailed analysis here.
Above is a visual representation of how VMI’s earnings are expected to move in the future, which should give you some color on VMI’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 stable 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 $2,722.6M.
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 $3,514.3M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $155.45, which, compared to the current share price of $165.6, we find that Valmont Industries is fair value, maybe slightly overvalued at the time of writing.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company.
For VMI, there are three pertinent aspects you should look at:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE 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.