Arch Resources' estimated fair value is US$231 based on 2 Stage Free Cash Flow to Equity
Arch Resources' US$131 share price signals that it might be 43% undervalued
Analyst price target for ARCH is US$177 which is 23% below our fair value estimate
Today we will run through one way of estimating the intrinsic value of Arch Resources, Inc. (NYSE:ARCH) by estimating the company's future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Step By Step Through The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$442.4m
US$330.5m
US$271.2m
US$239.2m
US$221.3m
US$211.3m
US$206.2m
US$204.3m
US$204.5m
US$206.2m
Growth Rate Estimate Source
Analyst x4
Analyst x2
Est @ -17.92%
Est @ -11.80%
Est @ -7.51%
Est @ -4.50%
Est @ -2.40%
Est @ -0.93%
Est @ 0.10%
Est @ 0.82%
Present Value ($, Millions) Discounted @ 7.1%
US$413
US$288
US$221
US$182
US$157
US$140
US$128
US$118
US$110
US$104
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$1.9b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.5%) 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 7.1%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$4.6b÷ ( 1 + 7.1%)10= US$2.3b
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$4.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$131, the company appears quite good value at a 43% 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
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 Arch Resources 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 7.1%, which is based on a levered beta of 1.115. 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 Arch Resources
Strength
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for ARCH.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Good value based on P/E ratio and estimated fair value.
Threat
Annual revenue is expected to decline over the next 3 years.
What else are analysts forecasting for ARCH?
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize 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. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Arch Resources, we've compiled three fundamental aspects you should further research:
Risks: As an example, we've found 2 warning signs for Arch Resources that you need to consider before investing here.
Future Earnings: How does ARCH'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.
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
根据2阶段自由现金流对股本的估算,Arch Resources的估计公允价值为231美元。
Arch Resources的131美元股价表明其可能被低估43%。
分析师对ARCH的价格目标为177美元,比我们公允价值估算低23%。
今天我们将通过估算Arch Resources, Inc. (NYSE:ARCH)公司未来现金流的方式来估算其内在价值,并将其贴现到现在的价值。在此次计算中,我们将使用折现现金流(DCF)模型。如我们所示的例子那样,这并不难,信不信由你!
我们应该注意的是,估值的方法有很多种,就像DCF一样,每种技术在特定的情况下都有其优点和缺点。对于那些热爱股权分析的学习者来说,这里的 Simply Wall St 分析模型可能是一些感兴趣的内容。