Does the share price for DuluxGroup Limited (ASX:DLX) 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 DuluxGroup here.
Is DLX fairly valued?
I’ve used the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To begin, I pulled together the analyst consensus estimates of DLX’s levered free cash flow (FCF) over the next five years and discounted these values at the rate 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$616.25M. Keen to understand how I calculated this value? Take a look at our detailed analysis here.
In the visual above, we see how how DLX’s earnings are expected to move in the future, which should give you an idea of DLX’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. It’s appropriate 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. After discounting the terminal value back five years, the present value becomes AU$2.11B.
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$2.72B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of A$7.11, which, compared to the current share price of A$7.58, we see that DuluxGroup 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 DLX, there are three key aspects you should look at:
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Financial Health: Does DLX 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 DLX’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 DLX? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!