Lincoln Electric Holdings' estimated fair value is US$206 based on 2 Stage Free Cash Flow to Equity
Lincoln Electric Holdings' US$196 share price indicates it is trading at similar levels as its fair value estimate
Our fair value estimate is 9.4% lower than Lincoln Electric Holdings' analyst price target of US$227
Today we will run through one way of estimating the intrinsic value of Lincoln Electric Holdings, Inc. (NASDAQ:LECO) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
The Model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$537.9m
US$584.8m
US$595.6m
US$618.4m
US$637.8m
US$656.3m
US$674.4m
US$692.2m
US$709.9m
US$727.7m
Growth Rate Estimate Source
Analyst x6
Analyst x6
Analyst x2
Analyst x1
Est @ 3.13%
Est @ 2.91%
Est @ 2.75%
Est @ 2.64%
Est @ 2.56%
Est @ 2.51%
Present Value ($, Millions) Discounted @ 7.4%
US$501
US$507
US$481
US$465
US$447
US$429
US$410
US$392
US$375
US$358
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$4.4b
After 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. 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 have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.4%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$15b÷ ( 1 + 7.4%)10= US$7.3b
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$12b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$196, the company appears about fair value at a 4.6% 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.
NasdaqGS:LECO Discounted Cash Flow June 1st 2024
The 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 Lincoln Electric Holdings 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 7.4%, which is based on a levered beta of 1.084. 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.
SWOT Analysis for Lincoln Electric Holdings
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings and cashflows.
Dividends are covered by earnings and cash flows.
Dividend information for LECO.
Weakness
Earnings growth over the past year is below its 5-year average.
Dividend is low compared to the top 25% of dividend payers in the Machinery market.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Current share price is below our estimate of fair value.
Threat
Annual earnings are forecast to grow slower than the American market.
What else are analysts forecasting for LECO?
Moving On:
Although the valuation of a company is important, 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. Instead the best use for 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 the risk free rate can significantly impact the valuation. For Lincoln Electric Holdings, we've put together three pertinent elements you should assess:
Risks: For instance, we've identified 2 warning signs for Lincoln Electric Holdings that you should be aware of.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for LECO's future outlook? Check out our management and board analysis with insights 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 an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
主要见解
Lincoln Electric Holdings的估值为206美元,基于2个阶段自由现金流至股本
Lincoln Electric Holdings的196美元股价表明其交易水平与公允价值估计相似
我们的公允价值估计比Lincoln Electric Holdings的分析师价格目标227美元低9.4%
今天我们将通过一种估算Lincoln Electric Holdings, Inc.(纳斯达克:LECO)内在价值的方法来进行,即通过预测未来的现金流,然后将它们折现到今天的价值。这将使用折现现金流(DCF)模型来完成。别让术语吓到你,它背后的数学实际上是很简单的。
现金流折现率和实际现金流是折现现金流最重要的输入。您不必同意这些输入,我建议您重新计算并对其进行调整。DCF也不考虑行业可能的周期性或公司未来的资本需求,因此不能完全展示公司的潜在表现。考虑到我们正在看作为潜在股东的Lincoln Electric Holdings,股权成本被用作折现率,而不是资本成本(或资本加权平均成本,WACC),它考虑了负债。在这次计算中,我们使用了7.4%,这是基于Levered Beta 1.084的。Beta是股票的波动性指数,相对于整个市场而言。我们从与全球可比公司具有可比性的行业平均Beta获取我们的Beta,其范围在0.8到2.0之间,这是一个稳定业务的合理范围。
Lincoln Electric Holdings的SWOT分析
优势
去年盈利增长超过了行业平均水平。
债务得到充分覆盖,收入和现金流决定了债务水平。
分红派息由收入和现金流决定。
LECO股息信息。
弱点
过去一年的盈利增长低于过去五年的平均水平。
与机械市场前25%的股息支付者相比,分红较低。
机会
预计未来3年的年度收益将增长。
当前股价低于我们估计的公平价值。
威胁
预计年度收益增长速度将慢于美国市场。
分析师还预测LECO会有什么呢?
接下来:
尽管公司估值很重要,但它仅是需要评估的众多因素之一。DCF模型并不是投资估值的全部和终极标准。相反,DCF模型的最佳用途是测试某些假设和理论,以查看它们是否导致公司被低估或高估。例如,公司权益成本或无风险利率的变化都可以显着影响估值。对于Lincoln Electric Holdings,我们整理了3个相关的要素供您参考:
风险:例如,我们已经为Lincoln Electric Holdings确定了两个警告信号,您需要注意。