Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Peugeot SA. (ENXTPA:UG) as an investment opportunity. 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 Peugeot here.
Crunching the numbers
I’ve used 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 begin, I pulled together the analyst consensus estimates of UG’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.87%. 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 €7.97B. Keen to know how I arrived at this number? Check out our detailed analysis here.
Above is a visual representation of how UG’s earnings are expected to move in the future, which should give you some color on UG’s outlook. Then, 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 €20.03B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is €28.00B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of €31.34, which, compared to the current share price of €20.35, we see that Peugeot is quite undervalued at a 35.06% 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 UG, there are three pertinent factors you should further research:
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Financial Health: Does UG 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 UG’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 UG? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!