Does the share price for BHP Billiton plc (LSE:BLT) 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 December 2017 so be sure check the latest calculation for BHP Billiton here.
Crunching the numbers
We are going to use a two-stage DCF 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. Firstly, I took the analyst consensus estimates of BLT’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 10.8%. 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 $36,205.9M. Keen to understand how I arrived at this number? Check out our detailed analysis here.
The infographic above illustrates how BLT’s earnings are expected to move going forward, which should give you an idea of BLT’s outlook. Now we need to determine the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual 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 $54,355.3M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $90,561.2M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of £12.72, which, compared to the current share price of £14.635, we see that BHP Billiton is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For BLT, I’ve compiled three relevant aspects you should further examine:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the LSE 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.