Using the 2 Stage Free Cash Flow to Equity, A. O. Smith fair value estimate is US$90.66
A. O. Smith's US$83.68 share price indicates it is trading at similar levels as its fair value estimate
The US$88.23 analyst price target for AOS is 2.7% less than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of A. O. Smith Corporation (NYSE:AOS) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$548.9m
US$604.1m
US$663.2m
US$701.1m
US$731.2m
US$758.4m
US$783.5m
US$807.3m
US$830.3m
US$852.7m
Growth Rate Estimate Source
Analyst x7
Analyst x8
Analyst x4
Analyst x1
Est @ 4.29%
Est @ 3.72%
Est @ 3.32%
Est @ 3.04%
Est @ 2.84%
Est @ 2.70%
Present Value ($, Millions) Discounted @ 7.4%
US$511
US$523
US$535
US$526
US$511
US$493
US$474
US$455
US$435
US$416
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$4.9b
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 7.4%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$17b÷ ( 1 + 7.4%)10= US$8.4b
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$13b. 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$83.7, the company appears about fair value at a 7.7% 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. 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 A. O. Smith 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 1.100. 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 A. O. Smith
Strength
Earnings growth over the past year exceeded the industry.
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for AOS.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Building 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 AOS?
Next Steps:
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. 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 A. O. Smith, there are three further factors you should consider:
Financial Health: Does AOS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does AOS'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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
キーインサイト
フリーキャッシュフローから株式の2段階目を使用して、A. D. Smithの公正価値の見積もりは90.66米ドルです。
A. O. Smithの株価83.68米ドルは、公正価値の見積もりと同じレベルで取引されていることを示しています。
AOSのアナリスト予想株価88.23米ドルは、公正価値の見積もりよりも2.7%低いです。
今日は、A. O. Smith Corporation(NYSE:AOS)を投資機会として魅力的かどうかを見積もるために使用される評価方法の簡単な実行を行います。将来のキャッシュフローをプロジェクトして現在価値に割引することによって、割引キャッシュフロー(DCF)モデルを適用するためのツールを適用します。信じるか信じないかわかりませんが、私たちの例から見るように、それほど難しくありません!
割引キャッシュフローにとって最も重要な入力は、割引率、そしてもちろん実際のキャッシュフローです。これらの結果に同意できない場合は、計算自体を試して仮定を変更してみてください。DCFは、業界の可能性の循環性や企業の将来の資本需要を考慮していないため、企業の潜在的なパフォーマンスの完全な概要を提供しません。A. O. Smithを潜在的な株主として見ているため、費用に対して資本コストではなく、株式のコストを割引率として使用しています。これにより、1.100のレバレッジ付きベータに基づいて、7.4%を使用しています。ベータとは、市場全体に対する株式のボラティリティの尺度です。私たちは、0.8から2.0の範囲内の許容範囲として、グローバルに比較可能な企業の業界平均ベータからベータを取得しています。
A. O. Smithに関するSWOT分析
強み
過去1年間の利益成長率は業界平均を上回りました。
負債はリスクとして見られていません。
配当金は収益やキャッシュフローで十分カバーされています。
AOSの配当情報。
弱み
建設市場の25%上位の配当支払い者に比べて、配当が低いです。
機会
次の3年間、年間利益が成長する予定です。
現在の株価は、公正な価値の見積もりを下回っています。
脅威
アメリカ市場よりも年間収益成長が遅いと予測されています。
アナリストはAOSについて、他に何を予想しているのでしょうか?
次のステップ:
投資テーゼを構築するための評価はコインの片面に過ぎず、企業の調査を行う場合に見るメトリックスに限定してはなりません。DCFモデルは投資評価の全部ではありません。代わりに、DCFモデルの最良の使用法は、企業が過小評価されているか、過大評価されているかを確認するための特定の仮定と理論をテストすることです。たとえば、企業の資本コストや無リスク利回りの変更は、評価に大きな影響を与える可能性があります。A. O. Smithの場合、考慮すべき3つの追加要因があります。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。
オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。