An Intrinsic Calculation For Daimler Truck Holding AG (ETR:DTG) Suggests It's 42% Undervalued

Key Insights

• Daimler Truck Holding's estimated fair value is €65.26 based on 2 Stage Free Cash Flow to Equity
• Current share price of €38.13 suggests Daimler Truck Holding is potentially 42% undervalued
• The €44.39 analyst price target for DTG is 32% less than our estimate of fair value

In this article we are going to estimate the intrinsic value of Daimler Truck Holding AG (ETR:DTG) by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

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What's The Estimated Valuation?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. 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. 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. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF (€, Millions)	€2.66b	€2.76b	€2.85b	€3.21b	€3.41b	€3.56b	€3.68b	€3.79b	€3.87b	€3.95b
Growth Rate Estimate Source	Analyst x9	Analyst x9	Analyst x7	Analyst x2	Analyst x2	Est @ 4.33%	Est @ 3.41%	Est @ 2.77%	Est @ 2.32%	Est @ 2.00%
Present Value (€, Millions) Discounted @ 7.9%	€2.5k	€2.4k	€2.3k	€2.4k	€2.3k	€2.3k	€2.2k	€2.1k	€2.0k	€1.8k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = €22b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 1.3%. We discount the terminal cash flows to today's value at a cost of equity of 7.9%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = €4.0b× (1 + 1.3%) ÷ (7.9%– 1.3%) = €60b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= €60b÷ ( 1 + 7.9%)¹⁰= €28b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €50b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €38.1, the company appears quite good value at a 42% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Daimler Truck Holding 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 accounts for debt. In this calculation we've used 7.9%, which is based on a levered beta of 1.536. Beta is a measure of a stock's volatility, compared 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.

View our latest analysis for Daimler Truck Holding

SWOT Analysis for Daimler Truck Holding

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Daimler Truck Holding, we've compiled three relevant elements you should assess:

1. Risks: Take risks, for example - Daimler Truck Holding has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
2. Future Earnings: How does DTG's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
3. Other Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every German stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.