Does the share price for Sanoma Oyj (HLSE:SAA1V) 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 April 2018 so be sure check the latest calculation for Sanoma Oyj here.
Crunching the numbers
I use what is known as the 2-stage model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off, I took the analyst consensus estimates of SAA1V’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.15%. This resulted in a present value of 5-year cash flow of €583.10M. Keen to know how I arrived at this number? Read our detailed analysis here.
Above is a visual representation of how SAA1V’s top and bottom lines are expected to move going forward, which should give you some color on SAA1V’s outlook. Next, I determine 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 €1.38B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €1.97B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of €12.05, which, compared to the current share price of €9.62, we find that Sanoma Oyj is about right, perhaps slightly undervalued at a 20.17% discount to what it is available for right now.
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. What is the reason for the share price to differ from the intrinsic value? For SAA1V, I’ve compiled three pertinent aspects you should look at:
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Financial Health: Does SAA1V 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 SAA1V’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 SAA1V? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!