Calculation of the intrinsic value of Cargotec Corporation (HEL: CGCBV)

Today we are going to take a simple overview of a valuation method used to estimate the attractiveness of Cargotec Corporation (HEL: CGCBV) as an investment opportunity by projecting its future cash flows, then updating them to the current value. One way to do this is to use the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too hard to follow, as you will see in our example!

Remember, however, that there are many ways to estimate the value of a business and that a DCF is just one method. Anyone interested in learning a little more about intrinsic value should have a read of the Simply Wall St.

Discover our latest analyzes for Cargotec

Crunch the numbers

We are going to use a two-step DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. 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 the last reported value. We assume that companies with decreasing free cash flow will slow their withdrawal rate, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow down more in the early years than in the later years.

Typically, 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 present value:

10-year Free Cash Flow (FCF) forecast

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = 1.5 billion euros

The second stage is also known as 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 of the 10-year government bond yield of 0.3%. We discount the terminal cash flows to their present value at a cost of equity of 7.7%.

Terminal value (TV)= FCF₂₀₃₀ × (1 + g) ÷ (r – g) = 238 million euros × (1 + 0.3%) ÷ (7.7% – 0.3%) = 3.2 billion euros

Present value of terminal value (PVTV)= TV / (1 + r)^ten= 3.2 billion euros ÷ (1 + 7.7%)^ten= 1.5 billion euros

The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is 3.0 billion euros. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of 44.7 €, the company appears on the fair value with a discount of 3.9% compared to the current share price. Remember though, this is only a rough estimate, and like any complex formula – garbage in, garbage out.

The hypotheses

Now the most important data for a discounted cash flow is the discount rate and, of course, the actual cash flow. You don’t have to agree with these entries, I recommend that you redo the math yourself and play around with it. 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 view Cargotec 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 debt into account. In this calculation, we used 7.7%, which is based on a leveraged beta of 1.272. 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 globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

To move on:

Valuation is only one side of the coin in terms of building your investment thesis, and ideally it won’t be the only analysis you look at for a business. The DCF model is not a perfect inventory valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. For Cargotec, we have put together three essential aspects that you should consider:

1. Risks: Concrete example, we have spotted 5 warning signs for Cargotec you have to be aware of it.
2. Future income: How does CGCBV’s growth rate compare to its peers and to the overall market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth forecast chart.
3. Other strong companies: Low debt, high returns on equity, and good past performance are essential 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 Finnish stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim 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 information. Simply Wall St has no position in any of the stocks mentioned.
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