Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Uponor Oyj (HLSE:UPONOR) 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 Uponor Oyj here.
Is UPONOR fairly valued?
I will be using the 2-stage growth 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, I use the analyst consensus forecast of UPONOR’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.74%. This resulted in a present value of 5-year cash flow of €285.71M. Keen to know how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how UPONOR’s top and bottom lines are expected to move in the future, which should give you some color on UPONOR’s outlook. Next, I determine 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 perpetual 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 €706.93M.
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 €992.65M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of €13.57, which, compared to the current share price of €14.59, we find that Uponor Oyj 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 UPONOR, there are three important aspects you should further research:
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Financial Health: Does UPONOR 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 UPONOR’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 UPONOR? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!