In This Article:
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Baby Bunting Group Limited (ASX:BBN) as an investment opportunity. 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 May 2018 so be sure check the latest calculation for Baby Bunting Group here.
Is BBN fairly valued?
I’ve used the 2-stage growth 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. To start off, I pulled together the analyst consensus forecast of BBN’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.55%. 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 AU$35.63M. Want to understand how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how BBN’s earnings are expected to move in the future, which should give you some color on BBN’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 stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes AU$170.94M.
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 AU$206.56M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of A$1.64, which, compared to the current share price of A$1.56, we find that Baby Bunting Group is about right, perhaps slightly undervalued at a 4.86% discount to what it is available for right now.
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 BBN, I’ve compiled three relevant factors you should look at:
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Financial Health: Does BBN 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.
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Future Earnings: How does BBN’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.
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Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of BBN? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!