Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Illinois Tool Works Inc. (NYSE:ITW) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. This is done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in theSimply Wall St analysis model.
See our latest analysis for Illinois Tool Works
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.
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
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$21b
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 10-year government bond rate of 1.7%. We discount the terminal cash flows to today's value at a cost of equity of 7.9%.
Terminal Value (TV) = FCF2029× (1 + g) ÷ (r – g) = US$3.6b× (1 + 1.7%) ÷ 7.9%– 1.7%) = US$59b
Present Value of Terminal Value (PVTV) = TV / (1 + r)10= US$59b÷ ( 1 + 7.9%)10= US$28b
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$48b. 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$176, 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.
Important 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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Illinois Tool Works 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 7.9%, which is based on a levered beta of 1.132. 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.
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. The DCF model is not a perfect stock valuation tool. 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. For Illinois Tool Works, I've compiled three relevant aspects you should look at:
Financial Health : Does ITW have a healthy balance sheet? Take a look at ourfree balance sheet analysis with six simple checkson key factors like leverage and risk.
Future Earnings : How does ITW'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 ourfree analyst growth expectation chart.
Other High Quality Alternatives : Are there other high quality stocks you could be holding instead of ITW? Exploreour interactive list of high quality stocksto get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock justsearch here.
If you spot an error that warrants correction, please contact the editor ateditorial-team@simplywallst.com. 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.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.
今天,我們將做一個簡單的運行的評估方法,用來估計伊利諾伊工具工程公司的吸引力。(紐約證券交易所市場代碼:ITW)作為一個投資機會,它預測未來的現金流,然後按今天的價值折現。這是使用貼現現金流(DCF)模型完成的。不要被行話所幹擾,它背後的數學其實是相當簡單的。
公司的價值可以有很多方面,所以我們要指出的是,DCF並不適合每一種情況。如果你想了解更多關於貼現現金流的知識,那麼這個計算背後的基本原理可以在SimpWall ST分析模型中詳細閲讀。
參見我們對伊利諾伊州工具工作的最新分析。
模型
我們將使用兩階段DCF模型,顧名思義,它考慮了兩個階段的增長。第一階段一般是一個較高的生長期,在第二個“穩定增長”期內,達到終點值的水平。首先,我們需要估計未來十年的現金流。在可能的情況下,我們使用分析師的估計,但當這些估計不可用時,我們從最後的估計或報告的價值中推斷出以前的自由現金流(FCF)。我們假設自由現金流減少的公司會減緩他們的收縮速度,而自由現金流量增長的公司在這段時間內會看到他們的增長速度放緩。我們這樣做是為了反映,經濟增長在最初幾年比以後幾年要慢得多。
一般來説,我們假設今天的一美元比未來的一美元更值錢,因此我們需要對這些未來現金流的總和進行貼現,才能得出現值估計數:
10年自由現金流量估計數
(“EST”=簡單華爾街估算的FCF增長率)
10年現金流量現值=210億美元
我們現在需要計算終端價值,它代表了這十年之後的所有未來現金流。戈登增長公式用於計算終端價值,其未來年增長率等於1.7%的10年期政府債券利率。我們以7.9%的股本成本將終端現金流折現到今天的價值。
終端值(TV)=FCF 2029×(1+g)χ(R-g)=36億美元×(1+1.7%)χ7.9%-1.7%)=59B美元
終端值(PVTV)=TV/(1+r)10=59B美元(1+7.9%)10=280億美元
然後,總價值,即股本價值,是未來現金流量的現值之和,在這種情況下是480億美元。為了獲得每股內在價值,我們將其除以已發行股票的總數量。與目前176美元的股價相比,該公司在撰寫本報告時似乎以公允價值為準。不過,請記住,這只是一個大致的估值,就像任何複雜的公式一樣--垃圾進入,垃圾輸出。
重要假設
我們要指出,貼現現金流最重要的投入是貼現率,當然還有實際現金流。投資的一部分是你自己對一家公司未來業績的評估,所以你自己試試計算,並檢查你自己的假設。DCF也沒有考慮一個行業的可能週期性,也沒有考慮公司未來的資本需求,因此它沒有全面描述一家公司的潛在業績。考慮到我們把伊利諾伊州的工具視為潛在的股東,股權成本被用作貼現率,而不是資本成本(或加權平均資本成本,WACC)。在這個計算中,我們使用了7.9%,這是基於槓桿貝塔1.132。與整個市場相比,貝塔是衡量股票波動性的一個指標。我們從全球可比公司的行業平均貝塔中得到我們的β值,限制在0.8到2.0之間,這對於穩定的業務來説是一個合理的範圍。
下一步:
就建立你的投資論點而言,估值只是問題的一個方面,它不應該是你研究一家公司時唯一的衡量標準。DCF模型不是一個完善的股票估值工具。相反,它應該被看作是一種指南,“如果這種股票被低估/高估,需要哪些假設是正確的?”如果一家公司以不同的速度增長,或者如果它的股本成本或無風險利率發生了劇烈的變化,那麼它的產出就會看起來大不相同。對於伊利諾伊工具的工作,我已經編譯了三個相關的方面,您應該看看:
財務健康:IT W有一個健康的資產負債表嗎?看看我們的自由資產負債表分析,有六個簡單的支票,關鍵因素,如槓桿和風險。
未來收益:ITW的增長率與同行和更廣泛的市場相比如何?通過與我們自由的分析師增長預期圖進行交互,深入挖掘未來幾年分析師的共識數字。
其他高質量的替代品:是否還有其他高質量的股票你可以持有而不是ITW?開發高質量庫存的互動列表,以瞭解還有什麼是你可能會錯過的!
PS。簡單地説,華爾街每天更新其每隻美國股票的DCF計算,因此,如果你想找到任何其他股票的內在價值,只需在這裏搜索。
如果你發現一個值得糾正的錯誤,請聯繫編輯-Team@simplyWallst.com。這篇文章簡單地説是華爾街的,本質上是一般性的。它不構成買賣任何股票的建議,也不考慮你的目標,或你的財務狀況。簡單地説,華爾街在提到的股票中沒有立場。
我們的目標是為您帶來由基礎數據驅動的長期重點研究分析。請注意,我們的分析可能不考慮最新的價格敏感的公司公告或定性材料。感謝您的閲讀。