![]() This article by Simply Wall St is general in nature. Alternatively, email editorial-team (at). Have feedback on this article? Concerned about the content? Get in touch with us directly. If you want to find the calculation for other stocks just search here. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. 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! Risks: We feel that you should assess the 5 warning signs for HP (2 shouldn't be ignored!) we've flagged before making an investment in the company.įuture Earnings: How does HPQ'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. Can we work out why the company is trading at a discount to intrinsic value? For HP, we've compiled three relevant elements you should assess: Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. DCF models are not the be-all and end-all of investment valuation. Moving On:Īlthough the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. 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. Beta is a measure of a stock's volatility, compared to the market as a whole. In this calculation we've used 8.7%, which is based on a levered beta of 1.433. Given that we are looking at HP 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. 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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The first is the discount rate and the other is the cash flows. The calculation above is very dependent on two assumptions. We do this to reflect that growth tends to slow more in the early years than it does in later years.Ī DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 10-year free cash flow (FCF) forecast 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. 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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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. We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. ![]() ![]() Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. ( NYSE:HPQ) by taking the forecast future cash flows of the company and discounting them back to today's value. Today we will run through one way of estimating the intrinsic value of HP Inc.
0 Comments
Leave a Reply. |