In this article I am going to calculate the intrinsic value of Barratt Developments plc (LSE:BDEV) using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in April 2018 so be sure check the latest calculation for Barratt Developments here.
Is BDEV fairly valued?
I will be using 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 start off, I took the analyst consensus estimates of BDEV’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.3%. 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 UK£2.30B. Keen to understand how I calculated this value? Check out our detailed analysis here.
In the visual above, we see how how BDEV’s top and bottom lines are expected to move going forward, which should give you an idea of BDEV’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 UK£7.81B.
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 UK£10.11B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of £10.00, which, compared to the current share price of £5.596, we find that Barratt Developments is quite good value at a 44.03% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation 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 BDEV, I’ve put together three relevant aspects you should further research:
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Financial Health: Does BDEV 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 BDEV’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 BDEV? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!