Does the January price of Jabil Inc. (NYSE: JBL) stock reflect its true value? Today we’re going to estimate the intrinsic value of the stock by taking the company’s future cash flow forecast and discounting it to today’s value. Our analysis will use the discounted cash flow (DCF) model. Don’t be put off by the lingo, the underlying calculations are actually pretty straightforward.
We generally think of a business’s value as the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something that interests you.
See our latest review for Jabil
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 stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and therefore the sum of those future cash flows is then discounted to today’s value. :
10-year free cash flow (FCF) forecast
|Leverage FCF ($, Millions)||US $ 688.0 million||US $ 787.0 million||US $ 910.0 million||US $ 1.00 billion||US $ 1.08 billion||US $ 1.14 billion||US $ 1.19 billion||US $ 1.24 billion||US $ 1.28 billion||US $ 1.32 billion|
|Source of estimated growth rate||Analyst x1||Analyst x1||Analyst x1||East @ 9.9%||East @ 7.52%||Est @ 5.85%||East @ 4.68%||Est @ 3.87%||Is 3.3%||East @ 2.89%|
|Present value (in millions of dollars) discounted at 7.7%||US $ 639||US $ 678||US $ 728||US $ 742||US $ 741||US $ 728||US $ 707||$ 682||US $ 654||US $ 624|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 6.9 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. For a number of reasons, a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 7.7%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 1.3 billion × (1 + 2.0%) ÷ (7.7% – 2.0%) = US $ 23 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 23 billion ÷ (1 + 7.7%)ten= US $ 11 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is US $ 18 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current price of US $ 69.4, the company appears to be quite undervalued with a 44% discount from the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
The above calculation is very dependent on two assumptions. One is the discount rate and the other is the cash flow. Part of investing is coming up with 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 full picture of a company’s potential performance. Since we view Jabil as a potential shareholder, 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 1.320. 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 comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Move on :
Valuation is only one side of the coin in terms of building your investment thesis, and it’s just one of the many factors you need to evaluate for a business. DCF models are not the ultimate solution for investment valuation. 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, production can be very different. What is the reason why the stock price is below intrinsic value? For Jabil, we’ve put together three more things you should look at:
- Risks: We think you should evaluate the 2 warning signs for Jabil we reported before making an investment in the business.
- Management: Have insiders increased their stocks to take advantage of market sentiment about JBL’s future prospects? Check out our management and board analysis with information on CEO compensation and governance factors.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. Simply Wall St updates its DCF calculation for every US 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. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is 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 documents. Simply Wall St has no position in any of the stocks mentioned.