Is there an opportunity with the 21% undervaluation of Schoeller-Bleckmann Oilfield Equipment Aktiengesellschaft (VIE: SBO)?
How far is Schoeller-Bleckmann Oilfield Equipment Aktiengesellschaft (VIE: SBO) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by taking expected future cash flows and discounting them to today’s value. Our analysis will use the discounted cash flow (DCF) model. It may sound complicated, but it’s actually quite simple!
We generally think of a business’s value as the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something of interest to you.
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Crunch the numbers
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually, the first stage is higher growth, and the second stage is a lower growth stage. First, we need to estimate the cash flow of the business over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
In general, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year Free Cash Flow (FCF) estimate
|Leverage FCF (€, Millions)||– € 8.80m||€ 25.4m||44.4 M €||€ 54.5m||€ 61.7m||67.5 million euros||€ 71.9m||€ 75.3m||77.8 million euros||€ 79.7m|
|Source of estimated growth rate||Analyst x4||Analyst x3||Analyst x1||Analyst x1||East @ 13.23%||Est @ 9.33%||Est @ 6.59%||East @ 4.68%||East @ 3.34%||East @ 2.41%|
|Present value (€, Millions) discounted at 9.6%||– € 8.0||€ 21.1||€ 33.7||€ 37.7||€ 38.9||€ 38.8||€ 37.8||€ 36.1||€ 34.0||€ 31.7|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 301 M €
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.2%. We discount the terminal cash flows to their present value at a cost of equity of 9.6%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = € 80m × (1 + 0.2%) ÷ (9.6% – 0.2%) = € 848m
Present value of terminal value (PVTV)= TV / (1 + r)ten= € 848m ÷ (1 + 9.6%)ten= 338 M €
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the Total Equity Value, which in this case is € 639m. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of € 32.0, the company appears to be slightly undervalued with a discount of 21% compared to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
The above calculation is very dependent on two assumptions. One is the discount rate and the other is the cash flow. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Schoeller-Bleckmann Oilfield Equipment as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes into account the debt. In this calculation, we used 9.6%, which is based on a leveraged beta of 2,000. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
While a business valuation is important, ideally, it won’t be the only analysis you look at for a business. The DCF model is not a perfect stock assessment tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. What is the reason why the stock price is below intrinsic value? For Schoeller-Bleckmann Oilfield Equipment, there are three additional aspects that you should explore:
- Financial health: Does SBO 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.
- Future benefits: How does SBO’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!
PS. Simply Wall St updates its DCF calculation for every Austrian stock every day, so if you want to find the intrinsic value of any other stock just search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in the mentioned stocks.
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