Calculating the intrinsic value of Clean Harbors, Inc. (NYSE:CLH)

Key findings

• The estimated fair value of Clean Harbors is $248 based on 2-step free cash flow to equity
• The current share price of $228 suggests that Clean Harbors may be trading close to its fair value
• The analyst price target for CLH is $229, 8.0% below our fair value estimate.

In this article, we will estimate the intrinsic value of Clean Harbors, Inc. (NYSE:CLH) by taking the company’s projected future cash flows and discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. There’s actually not too much involved in it, 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 on Clean Harbors

Step by step through the calculation

We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the early stage, the company might have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. In the first stage, we need to estimate the company’s cash flows for the next ten years. Where possible, we use analyst estimates, but when these are not 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 down 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, the sum of these future cash flows is discounted to today’s value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 4.3 billion US dollars

The second phase is also called the terminal value, which is the company’s cash flow after the first phase. 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 2.4%. We discount the terminal cash flows to today’s value at a cost of equity of 7.1%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = $823 million × (1 + 2.4%) ÷ (7.1% – 2.4%) = $18 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 18 billion US dollars ÷ (1 + 7.1%)¹⁰= 9.1 billion US dollars

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is $13 billion. In the final step, we divide the equity value by the number of shares outstanding. Relative to the current share price of $228, the company appears roughly fairly valued at an 8.3% 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’d like to point out that the key inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. 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 view Clean Harbors 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 7.1%, which is based on a leveraged beta of 1.020. 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 clean ports

Go on:

While the DCF calculation is important, it is only one of many factors you need to evaluate a company. DCF models are not the be-all and end-all of investment valuation. The best thing to do is to apply different cases and assumptions and see how they affect the company’s valuation. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. For Clean Harbors, we have compiled three other factors you should further investigate:

1. Risks: You should be aware 2 warning signs for clean ports we uncovered before considering investing in the company.
2. management:Have insiders increased their shares to capitalize on market sentiment regarding CLH’s future prospects? Read our management and board analysis with insights into CEO compensation and governance factors.
3. Other high-quality alternatives: Like a good all-rounder? Explore our interactive list of high-quality stocks to get a sense of what else you might be missing out on!

PS The Simply Wall St app runs a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, just search here.

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This Simply Wall St article is of a general nature. We comment 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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