Estimation of the intrinsic value of Nexans SA (EPA:NEX)

Key findings

• The estimated fair value of Nexans is €105 based on the 2-step free cash flow to equity
• The current share price of €107 suggests that Nexans may be trading close to its fair value
• Our fair value estimate is 4.8% below Nexans’ analyst price target of €110.

How far is Nexans SA (EPA:NEX) from its intrinsic value? Using the latest financial data, we will check if the stock is fairly valued by projecting its future cash flows and then discounting them to today’s value using the Discounted Cash Flow (DCF) model. Before you think you can’t understand, just keep reading! It’s actually a lot less complex than you think.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one method. If you want to learn more about discounted cash flow, you can read the basics of this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for Nexans

The method

We use a two-stage DCF model which, as the name suggests, considers two phases of growth. The first stage is generally a higher growth phase that stabilizes toward the terminal value captured in the second “steady growth” stage. First, we need to obtain estimates of 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 that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today. Therefore, the sum of these future cash flows is discounted to today’s value:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = €2.0 billion

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value that takes into account all future cash flows after the first period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 1.1%. We discount the terminal cash flows to today’s value at a cost of equity of 7.8%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = €352 million × (1 + 1.1%) ÷ (7.8% – 1.1%) = €5.3 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= €5.3 billion ÷ (1 + 7.8%)¹⁰= 2.5 billion euros

The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is €4.6 billion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of €107, the company seems roughly fair at the time of writing. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

The assumptions

We would like to point out that the main inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don’t agree with these results, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or a company’s future capital needs and therefore does not provide a complete picture of a company’s potential performance. Since we consider Nexans 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 takes debt into account. In this calculation, we used 7.8%, which is based on a leveraged beta of 1.257. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT analysis for Nexans

Go on:

Although the DCF calculation is important, it is only one of many factors you need to evaluate a company. It is not possible to get a foolproof valuation using a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. For Nexans, we have compiled three relevant factors that you should further investigate:

1. Risks: For example, we found 1 warning signal for Nexans that you should know.
2. Future income: How does NEX’s growth rate compare to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for each French stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment based solely on historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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