Calculating the fair value of Dana Incorporated (NYSE:DAN)

Key findings

• Using the 2-step free cash flow to equity, Dana’s estimated fair value is $13.09.
• With a share price of $12.10, Dana appears to be trading close to its estimated fair value
• The analyst price target of $13.86 for DAN is 5.9% above our fair value estimate

Today we’ll go over one way to estimate the intrinsic value of Dana Incorporated (NYSE:DAN) by taking the company’s projected future cash flows and discounting them to today’s value. This is done using the Discounted Cash Flow (DCF) model. It doesn’t actually take too much to do, even though it may seem quite complex.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without its flaws. If you still have some burning questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Dana

Processing the numbers

We use what is called a 2-stage model, which simply means that we have two different growth periods for the company’s cash flows. Generally speaking, the first stage is one of higher growth, and the second stage is one of lower growth. First, we need to get estimates for 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.

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:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 998 million US dollars

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value, which takes into account all future cash flows 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 government bond yield (2.4%) 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 12%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = $242 million × (1 + 2.4%) ÷ (12% – 2.4%) = $2.7 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= $2.7 billion ÷ (1 + 12%)¹⁰= 899 million US dollars

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 $1.9 billion. To get the intrinsic value per share, we divide that by the total number of shares outstanding. Compared to the current share price of $12.1, the company appears to be roughly fairly valued at a 7.5% discount to the current share price. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

The assumptions

We would like to point out that 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 consider Dana 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 12%, which is based on a leveraged beta of 2,000. 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 an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Dana

Next Steps:

Valuation is only one side of the coin when developing your investment thesis and should not be the only metric you consider when researching a company. It is not possible to get a foolproof valuation using a DCF model. A better approach would be to apply different cases and assumptions and see how they would affect the company’s valuation. For example, slightly adjusting the terminal value growth rate can dramatically change the overall result. For Dana, we have compiled three relevant factors that you should evaluate:

1. Risks: For example, we discovered 3 warning signs for Dana (1 is significant!) that you should know before investing here.
2. Future income: How is DAN’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 every American 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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