Nasdaq
华尔街日报Gates Industrial Corporation plc's (NYSE:GTES) Intrinsic Value Is Potentially 30% Above Its Share Price
Key Insights
- The projected fair value for Gates Industrial is US$28.76 based on 2 Stage Free Cash Flow to Equity
- Current share price of US$22.06 suggests Gates Industrial is potentially 23% undervalued
- Analyst price target for GTES is US$27.92 which is 2.9% below our fair value estimate
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Gates Industrial Corporation plc (NYSE:GTES) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
The Method
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
| 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | |
| Levered FCF ($, Millions) | US$385.0m | US$441.5m | US$471.0m | US$495.2m | US$517.8m | US$539.4m | US$560.5m | US$581.3m | US$602.1m | US$623.0m |
| Growth Rate Estimate Source | Analyst x6 | Analyst x2 | Analyst x1 | Est @ 5.13% | Est @ 4.57% | Est @ 4.18% | Est @ 3.90% | Est @ 3.71% | Est @ 3.57% | Est @ 3.48% |
| Present Value ($, Millions) Discounted @ 9.4% | US$352 | US$369 | US$360 | US$346 | US$330 | US$314 | US$299 | US$283 | US$268 | US$253 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$3.2b
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 3.3%. We discount the terminal cash flows to today's value at a cost of equity of 9.4%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$623m× (1 + 3.3%) ÷ (9.4%– 3.3%) = US$10b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$10b÷ ( 1 + 9.4%)10= US$4.3b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$7.4b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$22.1, the company appears a touch undervalued at a 23% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Gates Industrial 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 9.4%, which is based on a levered beta of 1.331. 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.
See our latest analysis for Gates Industrial
SWOT Analysis for Gates Industrial
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by earnings.
- Earnings growth over the past year is below its 5-year average.
- Annual earnings are forecast to grow for the next 4 years.
- Good value based on P/E ratio and estimated fair value.
- Debt is not well covered by operating cash flow.
- Annual earnings are forecast to grow slower than the American market.
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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 Gates Industrial, there are three pertinent factors you should explore:
- Risks: Take risks, for example - Gates Industrial has 2 warning signs (and 1 which is significant) we think you should know about.
- Future Earnings: How does GTES'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.
- 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 American 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.