What is the distance between Culti Milano SpA (BIT:CULT) and its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by taking the expected future cash flows and discounting them to the present value. Our analysis will use the discounted cash flow (DCF) model. Believe it or not, it’s not too hard to follow, as you’ll see in our example!
We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Step by step in the calculation
We use what is called a 2-stage model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported 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 more in early years than in later years.
Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
Estimated free cash flow (FCF) over 10 years
|Leveraged FCF (€, Millions)||€2.80m||€3.25m||€3.70m||€4.03 million||€4.30 million||€4.52 million||€4.71 million||€4.87 million||€5.02 million||€5.15 million|
|Growth rate estimate Source||Analyst x2||Analyst x2||Analyst x1||Is at 8.85%||Is at 6.72%||Is at 5.23%||Is at 4.18%||Is at 3.45%||Is at 2.94%||Is at 2.58%|
|Present value (in millions of euros) discounted at 8.1%||2.6 €||2.8 €||2.9 €||€3.0||2.9 €||2.8 €||2.7 €||2.6 €||2.5 €||2.4 €|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = €27 million
The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 1.8%. We discount terminal cash flows to present value at a cost of equity of 8.1%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = €5.1m × (1 + 1.8%) ÷ (8.1%– 1.8%) = €83m
Present value of terminal value (PVTV)= TV / (1 + r)ten= €83m÷ ( 1 + 8.1%)ten= €38m
The total value, or equity value, is then the sum of the discounted value of future cash flows, which in this case is €65 million. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of €10.7, the company looks quite undervalued at a 49% discount to the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
- Future earnings: How does CULT’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!