The projected fair value for Warrior Met Coal is US$67.78 based on 2 Stage Free Cash Flow to Equity
Current share price of US$51.68 suggests Warrior Met Coal is potentially 24% undervalued
The US$76.60 analyst price target for HCC is 13% more than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Warrior Met Coal, Inc. (NYSE:HCC) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
The Method
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$293.0m
US$239.1m
US$210.2m
US$193.9m
US$184.9m
US$180.2m
US$178.4m
US$178.5m
US$179.9m
US$182.2m
Growth Rate Estimate Source
Analyst x1
Est @ -18.38%
Est @ -12.12%
Est @ -7.73%
Est @ -4.66%
Est @ -2.51%
Est @ -1.01%
Est @ 0.04%
Est @ 0.78%
Est @ 1.30%
Present Value ($, Millions) Discounted @ 7.0%
US$274
US$209
US$171
US$148
US$132
US$120
US$111
US$104
US$97.6
US$92.3
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$1.5b
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 (2.5%) 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 7.0%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$4.1b÷ ( 1 + 7.0%)10= US$2.1b
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$3.5b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$51.7, the company appears a touch undervalued at a 24% 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.
Important Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Warrior Met Coal 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 7.0%, which is based on a levered beta of 1.100. 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 Warrior Met Coal
Strength
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for HCC.
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
Good value based on P/E ratio and estimated fair value.
Threat
Annual earnings are forecast to decline for the next 3 years.
What else are analysts forecasting for HCC?
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Warrior Met Coal, there are three additional factors you should further examine:
Risks: Take risks, for example - Warrior Met Coal has 3 warning signs (and 2 which shouldn't be ignored) we think you should know about.
Future Earnings: How does HCC'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.
关键见解
根据两阶段股权自由现金流,Warrior Met Coal的预计公允价值为67.78美元
目前的股价为51.68美元,表明Warrior Met Coal可能被低估了24%
分析师对HCC的目标股价为76.60美元,比我们对公允价值的估计高出13%
今天,我们将简单介绍一种估值方法,该方法通过计算预期的未来现金流并将其折现为今天的价值,来估算Warrior Met Coal, Inc.(纽约证券交易所代码:HCC)作为投资机会的吸引力。折扣现金流(DCF)模型是我们将应用的工具。听起来可能很复杂,但实际上很简单!
我们要指出的是,贴现现金流的最重要投入是贴现率,当然还有实际的现金流。投资的一部分是自己对公司未来业绩的评估,因此请自己尝试计算并检查自己的假设。DCF也没有考虑一个行业可能的周期性,也没有考虑公司未来的资本需求,因此它没有全面反映公司的潜在表现。鉴于我们将Warrior Met Coal视为潜在股东,因此使用权益成本作为贴现率,而不是构成债务的资本成本(或加权平均资本成本,WACC)。在此计算中,我们使用了7.0%,这是基于1.100的杠杆测试版。Beta是衡量股票与整个市场相比波动性的指标。我们的测试版来自全球可比公司的行业平均贝塔值,设定在0.8到2.0之间,这是一个稳定的业务的合理范围。
Warrior Met Coal 的 SWOT 分析
力量
债务不被视为风险。
股息由收益和现金流支付。
HCC 的股息信息。
弱点
在过去的一年中,收益有所下降。
与金属和矿业市场前25%的股息支付者相比,股息很低。
机会
根据市盈率和估计的公允价值,物有所值。
威胁
预计未来三年的年收入将下降。
分析师对HCC还有什么预测?
后续步骤:
就建立投资论点而言,估值只是硬币的一面,它只是公司需要评估的众多因素之一。DCF模型并不是投资估值的万能药。最好你运用不同的案例和假设,看看它们将如何影响公司的估值。例如,如果稍微调整终值增长率,则可能会极大地改变整体结果。我们能否弄清楚为什么公司的交易价格低于内在价值?对于 Warrior Met Coal 来说,您还应该进一步研究另外三个因素:
风险:例如,冒险吧——Warrior Met Coal有3个警告信号(其中2个不容忽视),我们认为你应该知道。