The projected fair value for Talos Energy is US$11.43 based on 2 Stage Free Cash Flow to Equity
With US$11.65 share price, Talos Energy appears to be trading close to its estimated fair value
The US$19.44 analyst price target for TALO is 70% more than our estimate of fair value
How far off is Talos Energy Inc. (NYSE:TALO) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
The Method
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$467.0m
US$160.5m
US$247.0m
US$194.0m
US$165.4m
US$149.5m
US$140.6m
US$135.7m
US$133.3m
US$132.6m
Growth Rate Estimate Source
Analyst x4
Analyst x2
Analyst x1
Analyst x1
Est @ -14.73%
Est @ -9.60%
Est @ -6.01%
Est @ -3.49%
Est @ -1.73%
Est @ -0.50%
Present Value ($, Millions) Discounted @ 9.5%
US$427
US$134
US$188
US$135
US$105
US$86.8
US$74.6
US$65.7
US$59.0
US$53.6
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$1.3b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 9.5%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.9b÷ ( 1 + 9.5%)10= US$773m
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$2.1b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$11.7, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
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 Talos Energy 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 9.5%, which is based on a levered beta of 1.543. 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 Talos Energy
Strength
Debt is well covered by cash flow.
Balance sheet summary for TALO.
Weakness
Interest payments on debt are not well covered.
Shareholders have been diluted in the past year.
What are analysts forecasting for TALO?
Opportunity
Good value based on P/S ratio compared to estimated Fair P/S ratio.
Threat
No apparent threats visible for TALO.
Moving On:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Talos Energy, we've put together three fundamental aspects you should look at:
Risks: To that end, you should learn about the 2 warning signs we've spotted with Talos Energy (including 1 which is potentially serious) .
Future Earnings: How does TALO'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
主要見解
根據兩階段自由現金流向股權模型,Talos Energy的預期公允價值爲11.43美元。
根據目前的11.65美元股價,Talos Energy似乎正在接近其預估的公允價值。
對TALO的分析師目標價爲19.44美元,比我們估算的公允價值高70%。
Talos Energy Inc. (NYSE:TALO)距離其內在價值有多遠?利用最近的財務數據,我們將估算公司未來的現金流,並以折現率計算現值,從而檢查該股是否定價合理。我們將使用折現現金流量模型(DCF)來進行此操作。不要被行話嚇到,它背後的數學實際上相當簡單。