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In this article I am going to calculate the intrinsic value of Crane Co. ( NYSE:CR ) by taking the expected future cash flows and discounting them to today’s value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model . Please also note that this article was written in February 2019 so be sure check out the updated calculation by following the link below.
Step by step through the calculation
I’m 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 perpetual stable growth rate. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow estimate
|Levered FCF ($, Millions)||$365.58||$453.10||$468.40||$500.80||$512.55|
|Source||Analyst x4||Analyst x1||Analyst x1||Analyst x1||Est @ 2.35%|
|Present Value Discounted @ 11.58%||$327.63||$363.91||$337.15||$323.05||$296.31|
Present Value of 5-year Cash Flow (PVCF) = US$1.6b
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 11.6%.
Terminal Value (TV) = FCF 2023 × (1 + g) ÷ (r – g) = US$513m × (1 + 2.7%) ÷ (11.6% – 2.7%) = US$5.9b
Present Value of Terminal Value (PVTV) = TV / (1 + r) 5 = US$5.9b ÷ ( 1 + 11.6%) 5 = US$3.4b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$5.1b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $85.56 . Compared to the current share price of $84.69, the stock is about right, perhaps slightly undervalued at a 1.0% discount to what it is available for right now.
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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Crane as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 11.6%, which is based on a levered beta of 1.218. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For CR, there are three relevant aspects you should further research:
- Financial Health : Does CR 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 CR’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 : Are there other high quality stocks you could be holding instead of CR? 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 does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here .
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If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org . This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.