Fair value estimate of Cranswick plc (LON:CWK)

Key findings

• Using the 2-step Free Cash Flow to Equity, the fair value of Cranswick is £53.37
• With a share price of GBP 46.15, Cranswick appears to be trading close to its estimated fair value
• The analyst price target of GBP 48.75 for CWK is 8.7% below our fair value estimate

How far is Cranswick plc (LON:CWK) from its intrinsic value? Using the most recent financial data, we will check whether the stock is fairly valued. To do this, we take the company’s forecast future cash flows and discount them to today’s value. This is done using the Discounted Cash Flow (DCF) model. Before you think you can’t understand, just read on! It’s actually a lot less complex than you think.

We would like to point out that there are many ways to value a company and that each method, like the DCF, has advantages and disadvantages in certain scenarios. If you still have questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Cranswick

Step by step through the calculation

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 estimate the next ten years of cash flows. Where possible, we use analyst estimates, but when these aren’t available, we extrapolate 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.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, we discount the value of these future cash flows to their estimated value in today’s dollars:

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) = £946 million

The second period is also called the terminal value. This is the company’s cash flow after the first period. For various reasons, a very conservative growth rate is used, which cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year Treasury yield (1.8%) to estimate future growth. In the same way as with the 10-year “growth” period, we discount future cash flows to today’s value, using a cost of equity of 6.2%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = £152 million × (1 + 1.8%) ÷ (6.2% – 1.8%) = £3.5 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= £3.5 billion ÷ (1 + 6.2%)¹⁰= £1.9 billion

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, giving the total value of equity, which in this case is £2.9 billion. To get the intrinsic value per share, we divide this by the total number of shares in issue. Relative to the current share price of £46.2, the company appears roughly fairly valued at a 14% discount to the current share price. However, remember that this is only an approximate valuation and as with any complex formula, where there’s rubbish in, there’s rubbish out.

The assumptions

The key inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing around with them. The DCF also doesn’t take into account the potential cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we’re looking at Cranswick 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 6.2%, which is based on a leveraged beta of 0.800. 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 Cranswick

Next Steps:

While the DCF calculation is important, it is only one of many factors you need to evaluate a company. The DCF model is not a perfect tool for stock valuation. It is best to apply different cases and assumptions and see how they affect the valuation of the company. For example, if the growth rate of the terminal value is adjusted slightly, it can change the overall result dramatically. For Cranswick, we have compiled three other factors for you to consider:

1. Financial health: Does CWK have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks of important factors such as debt ratio and risk.
2. Future income: How is CWK’s growth rate compared 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 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 you might be missing out on!

PS Simply Wall St updates its DCF calculation for each UK 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 solely on the basis of 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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