Fair value estimate of Airbus SE (EPA: AIR)

Does the Airbus SE (EPA: AIR) share price in April reflect what it is really worth? Today, we’re going to estimate the intrinsic value of the stock by projecting its future cash flows and then discounting them to present value. We will therefore take advantage of the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!

Remember, however, that there are many ways to estimate the value of a business and that a DCF is just one method. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.

Discover our latest analyzes for Airbus

The calculation

We use what is called a 2-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 lower growth stage. To begin with, we need to estimate the next ten years of cash flow. 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.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of those future cash flows to their estimated value in today’s dollars:

10-year free cash flow (FCF) estimate

(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = € 34 billion

After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. 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 0.4%. We discount the terminal cash flows to their present value at a cost of equity of 5.9%.

Terminal value (TV)= FCF₂₀₃₀ × (1 + g) ÷ (r – g) = € 6.1 billion × (1 + 0.4%) ÷ (5.9% – 0.4%) = € 113 billion

Present value of terminal value (PVTV)= TV / (1 + r)^ten= € 113bn ÷ (1 + 5.9%)^ten= 64 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 € 98bn. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of € 101, the company appears on the fair value at a discount of 19% from the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.

Important assumptions

The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. Part of investing is making 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 view Airbus 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 5.9%, which is based on a leveraged beta of 1.041. 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.

Next steps:

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 inventory valuation 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. If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. For Airbus, we have put together three relevant elements that you need to assess:

1. Risks: Take risks, for example – Airbus has 1 warning sign we think you should be aware of this.
2. Management: Have insiders increased their stocks to take advantage of market sentiment for AIR’s future outlook? Check out our management and board analysis with information on CEO compensation and governance factors.
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. The Simply Wall St app performs a daily discounted cash flow assessment for each stock in the ENXTPA. If you want to find the calculation for other actions, 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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