Discounted cashflows5/18/2023 ![]() In the final step we divide the equity value by the number of shares outstanding. The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$75b. ![]() We discount the terminal cash flows to today's value at a cost of equity of 11%. 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 2.1%. ![]() ![]() 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 need to discount the sum of these future cash flows to arrive at a present value estimate:Īfter calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. 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. Generally the first stage is higher growth, and the second stage is a lower growth phase. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.Ĭheck out our latest analysis for Schlumberger The Model 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. 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. How far off is Schlumberger Limited ( NYSE:SLB) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to today's value. The US$64.34 analyst price target for SLB is 23% more than our estimate of fair value Schlumberger's US$47.40 share price indicates it is trading at similar levels as its fair value estimate All rights reserved.Schlumberger's estimated fair value is US$52.41 based on 2 Stage Free Cash Flow to Equity All investments involve risks, including the possible loss of principal.įor the complete content and important disclosures, refer to the article pdf. Past performance does not guarantee future results. Any performance quoted represents past performance. Information does not address financial objectives, situation or specific needs of individual investors.Īny charts and graphs provided are for illustrative purposes only. This material is a general communication, which is not impartial, is for informational and educational purposes only, not a recommendation to purchase or sell specific securities, or to adopt any particular investment strategy. It is the responsibility of every person reading this material to fully observe the laws of any relevant country, including obtaining any governmental or other consent which may be required or observing any other formality which needs to be observed in that country. It is not addressed to any other person and may not be used by them for any purpose whatsoever. This material is for the benefit of persons whom the Firm reasonably believes it is permitted to communicate to and should not be forwarded to any other person without the consent of the Firm. The views expressed do not reflect the opinions of all investment personnel at Morgan Stanley Investment Management (MSIM) and its subsidiaries and affiliates (collectively the Firm”), and may not be reflected in all the strategies and products that the Firm offers. The views and opinions are those of the author as of the date of publication and are subject to change at any time due to market or economic conditions and may not necessarily come to pass.
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