Home Discount rate The intrinsic value of Carlisle Companies Incorporated (NYSE:CSL) is potentially 53% higher than its stock price

The intrinsic value of Carlisle Companies Incorporated (NYSE:CSL) is potentially 53% higher than its stock price

0

Does the June stock price for Carlisle Companies Incorporated (NYSE: CSL) reflect what it’s really worth? Today we are going to estimate the intrinsic value of the stock by projecting its future cash flows and then discounting them to the present value. We will use the Discounted Cash Flow (DCF) model for this purpose. There really isn’t much to do, although it may seem quite complex.

We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.

See our latest analysis for Carlisle Companies

The calculation

We use what is called a 2-stage model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To start, we need to estimate the cash flows for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported 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 more in early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:

Estimated free cash flow (FCF) over 10 years

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Leveraged FCF ($, millions)

$780.5 million

$917.0 million

$962.9 million

$1.02 billion

$1.06 billion

$1.10 billion

$1.13 billion

$1.16 billion

$1.19 billion

$1.22 billion

Growth rate estimate Source

Analyst x6

Analyst x6

Analyst x4

Analyst x1

Is at 4.23%

Is at 3.53%

Is at 3.05%

Is at 2.71%

Is at 2.47%

Is at 2.31%

Present value (millions of dollars) discounted at 6.9%

$730

$803

$789

$781

$762

$738

$712

$684

$656

$628

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $7.3 billion

We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used which 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 (1.9%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 6.9%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = $1.2 billion × (1 + 1.9%) ÷ (6.9%–1.9%) = $25 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= $25 billion ÷ (1 + 6.9%)ten= $13 billion

The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is $20 billion. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of US$257, the company appears to have pretty good value at a 35% discount to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.

dcf

The hypotheses

We emphasize that 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 entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Carlisle Companies 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 6.9%, which is based on a leveraged beta of 1.166. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Look forward:

Although a business valuation is important, it is only one of many factors you need to assess for a business. The DCF model is not a perfect stock valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or in the risk-free rate can have a significant impact on the valuation. Can we understand why the company is trading at a discount to its intrinsic value? For Carlisle companies, we have compiled three important aspects that you should consider in more detail:

  1. Risks: For example, we spotted 1 warning sign for Carlisle businesses you should be aware.

  2. Future earnings: How does CSL’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.

  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 strong trading fundamentals to see if there are any other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every US stock daily, so if you want to find the intrinsic value of any other stock, do a search here.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.