The projected fair value for Vertiv Holdings Co is US$115 based on 2 Stage Free Cash Flow to Equity
Vertiv Holdings Co is estimated to be 28% undervalued based on current share price of US$82.56
The US$103 analyst price target for VRT is 9.9% less than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of Vertiv Holdings Co (NYSE:VRT) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Step By Step Through The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$1.04b
US$1.29b
US$1.43b
US$1.93b
US$2.21b
US$2.45b
US$2.65b
US$2.83b
US$2.98b
US$3.11b
Growth Rate Estimate Source
Analyst x7
Analyst x4
Analyst x2
Analyst x1
Est @ 14.52%
Est @ 10.88%
Est @ 8.33%
Est @ 6.54%
Est @ 5.29%
Est @ 4.42%
Present Value ($, Millions) Discounted @ 7.6%
US$969
US$1.1k
US$1.1k
US$1.4k
US$1.5k
US$1.6k
US$1.6k
US$1.6k
US$1.5k
US$1.5k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$14b
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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 7.6%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$60b÷ ( 1 + 7.6%)10= US$29b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$43b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$82.6, the company appears a touch undervalued at a 28% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
NYSE:VRT Discounted Cash Flow July 19th 2024
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual 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 Vertiv Holdings Co 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 7.6%, which is based on a levered beta of 1.144. 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 Vertiv Holdings Co
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings and cashflows.
Balance sheet summary for VRT.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Electrical market.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Trading below our estimate of fair value by more than 20%.
Threat
Revenue is forecast to grow slower than 20% per year.
What else are analysts forecasting for VRT?
Looking Ahead:
Whilst important, the DCF calculation 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price sitting below the intrinsic value? For Vertiv Holdings Co, we've compiled three additional elements you should consider:
Risks: Case in point, we've spotted 2 warning signs for Vertiv Holdings Co you should be aware of.
Future Earnings: How does VRT'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 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. 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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
主要见解
基于2阶段自由现金流到股权的预测公允价值为Vertiv Holdings Co的股票为US$115
基于当前股价US$82.56,Vertiv Holdings Co的估值低估28%
纽交所上VRT的分析师目标价格为US$103,比我们的公允价值估计低9.9%
今天我们将通过一种估算Vertiv Holdings Co (NYSE:VRT)内在价值的方法,即通过把预期的未来现金流折现到今天的价值。其实现方式之一是采用折现现金流 (DCF) 模型。像这样的模型可能超出一般人的理解,但它们相当容易理解。