Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Relative to the current share price of AU$46.4, the company appears about fair value at a 15% discount to where the stock price trades currently. In the final step we divide the equity value by the number of shares outstanding. The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is AU$4.9b. We discount the terminal cash flows to today's value at a cost of equity of 9.1%. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:Īfter calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. We do this to reflect that growth tends to slow more in the early years than it does in later years. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. In the first stage we need to estimate the cash flows to the business over the next ten years. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. See our latest analysis for Domino's Pizza Enterprises Step By Step Through The Calculation For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. However, a DCF is just one valuation metric among many, and it is not without flaws. We generally believe that a company's value is the present value of all of the cash it will generate in the future. It may sound complicated, but actually it is quite simple! We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Today we will run through one way of estimating the intrinsic value of Domino's Pizza Enterprises Limited ( ASX:DMP) by taking the expected future cash flows and discounting them to their present value. The AU$53.13 analyst price target for DMP is 2.9% less than our estimate of fair value Domino's Pizza Enterprises' estimated fair value is AU$54.72 based on 2 Stage Free Cash Flow to EquityĬurrent share price of AU$46.43 suggests Domino's Pizza Enterprises is potentially trading close to its fair value
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