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.
主要見解
Lincoln Electric Holdings的估值爲206美元,基於2個階段自由現金流至股本
Lincoln Electric Holdings的196美元股價表明其交易水平與公允價值估計相似
我們的公允價值估計比Lincoln Electric Holdings的分析師價格目標227美元低9.4%
今天我們將通過一種估算Lincoln Electric Holdings, Inc.(納斯達克:LECO)內在價值的方法來進行,即通過預測未來的現金流,然後將它們折現到今天的價值。這將使用折現現金流(DCF)模型來完成。別讓術語嚇到你,它背後的數學實際上是很簡單的。
現金流折現率和實際現金流是折現現金流最重要的輸入。您不必同意這些輸入,我建議您重新計算並對其進行調整。DCF也不考慮行業可能的週期性或公司未來的資本需求,因此不能完全展示公司的潛在表現。考慮到我們正在看作爲潛在股東的Lincoln Electric Holdings,股權成本被用作折現率,而不是資本成本(或資本加權平均成本,WACC),它考慮了負債。在這次計算中,我們使用了7.4%,這是基於Levered Beta 1.084的。Beta是股票的波動性指數,相對於整個市場而言。我們從與全球可比公司具有可比性的行業平均Beta獲取我們的Beta,其範圍在0.8到2.0之間,這是一個穩定業務的合理範圍。
Lincoln Electric Holdings的SWOT分析
優勢
去年盈利增長超過了行業平均水平。
債務得到充分覆蓋,收入和現金流決定了債務水平。
分紅派息由收入和現金流決定。
LECO股息信息。
弱點
過去一年的盈利增長低於過去五年的平均水平。
與機械市場前25%的股息支付者相比,分紅較低。
機會
預計未來3年的年度收益將增長。
當前股價低於我們估計的公平價值。
威脅
預計年度收益增長速度將慢於美國市場。
分析師還預測LECO會有什麼呢?
接下來:
儘管公司估值很重要,但它僅是需要評估的衆多因素之一。DCF模型並不是投資估值的全部和終極標準。相反,DCF模型的最佳用途是測試某些假設和理論,以查看它們是否導致公司被低估或高估。例如,公司權益成本或無風險利率的變化都可以顯着影響估值。對於Lincoln Electric Holdings,我們整理了3個相關的要素供您參考:
風險:例如,我們已經爲Lincoln Electric Holdings確定了兩個警告信號,您需要注意。