The projected fair value for TransDigm Group is US$1,804 based on 2 Stage Free Cash Flow to Equity
TransDigm Group is estimated to be 25% undervalued based on current share price of US$1,348
Analyst price target for TDG is US$1,439 which is 20% below our fair value estimate
Today we will run through one way of estimating the intrinsic value of TransDigm Group Incorporated (NYSE:TDG) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Step By Step Through The Calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$2.37b
US$2.81b
US$3.12b
US$3.57b
US$3.90b
US$4.18b
US$4.43b
US$4.64b
US$4.83b
US$5.01b
Growth Rate Estimate Source
Analyst x12
Analyst x9
Analyst x4
Analyst x1
Est @ 9.35%
Est @ 7.30%
Est @ 5.86%
Est @ 4.85%
Est @ 4.14%
Est @ 3.65%
Present Value ($, Millions) Discounted @ 6.3%
US$2.2k
US$2.5k
US$2.6k
US$2.8k
US$2.9k
US$2.9k
US$2.9k
US$2.9k
US$2.8k
US$2.7k
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$27b
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 6.3%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$136b÷ ( 1 + 6.3%)10= US$74b
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$101b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$1.3k, the company appears a touch undervalued at a 25% 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
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. 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 TransDigm Group 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 6.3%, which is based on a levered beta of 0.916. 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 TransDigm Group
Strength
Earnings growth over the past year exceeded the industry.
Dividend is low compared to the top 25% of dividend payers in the Aerospace & Defense 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
Debt is not well covered by operating cash flow.
Total liabilities exceed total assets, which raises the risk of financial distress.
Annual revenue is forecast to grow slower than the American market.
Is TDG well equipped to handle threats?
Moving On:
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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" 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. Can we work out why the company is trading at a discount to intrinsic value? For TransDigm Group, we've put together three important aspects you should further research:
Risks: For example, we've discovered 3 warning signs for TransDigm Group (2 are potentially serious!) that you should be aware of before investing here.
Future Earnings: How does TDG'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.
主要見解
基於2階段自由現金流到股權的預測公允價值爲1804美元的TransDigm Group。
根據當前股價1348美元,預計TransDigm Group被低估25%。
分析師給TDG的價格目標是1439美元,低於我們的公允價值估計20%。
今天我們將通過一種方法,來估計TransDigm Group Incorporated (NYSE:TDG)的內在價值,即預測未來現金流並進行貼現。這將使用貼現現金流量(DCF)模型來完成。信不信由你,這並不太難,從我們的例子中你將看到!