Is DEUTZ Aktiengesellschaft (FRA:DEZ) Worth €7.29 Based On Intrinsic Value?

Shawn Clark

Updated Mon, Aug 20, 2018, 7:35 AM

I am going to run you through how I calculated the intrinsic value of DEUTZ Aktiengesellschaft (FRA:DEZ) by projecting its future cash flows and then discounting them to today’s value. I will use 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 August 2018 then I highly recommend you check out the latest calculation for DEUTZ by following the link below.

View our latest analysis for DEUTZ

Is DEZ fairly valued?

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. For this I used the consensus of the analysts covering the stock, as you can see below. 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 forecast

	2018	2019	2020	2021	2022
Levered FCF (€, Millions)	€61.10	€80.13	€80.06	€73.76	€57.00
Source	Analyst x3	Analyst x6	Analyst x5	Analyst x2	Analyst x1
Present Value Discounted @ 9.06%	€56.03	€67.38	€61.73	€52.15	€36.95

Present Value of 5-year Cash Flow (PVCF)= €274.23m

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 (0.5%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 9.1%.

Terminal Value (TV) = FCF₂₀₂₂ × (1 + g) ÷ (r – g) = €57.00m × (1 + 0.5%) ÷ (9.1% – 0.5%) = €673.14m

Present Value of Terminal Value (PVTV) = TV / (1 + r)⁵ = €673.14m ÷ ( 1 + 9.1%)⁵ = €436.38m

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 €710.61m. 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 €5.88. Compared to the current share price of €7.29, the stock is fair value, maybe slightly overvalued at the time of writing.

DB:DEZ Intrinsic Value Export August 20th 18

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at DEUTZ 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 9.1%, which is based on a levered beta of 0.900. 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. What is the reason for the share price to differ from the intrinsic value? For DEZ, I’ve put together three pertinent aspects you should further examine:

Financial Health: Does DEZ 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 DEZ’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 DEZ? 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 DE stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

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