Shares of United Internet AG (ETR:UTDI) could be 31% above their estimated intrinsic value

Key findings

• The estimated fair value of United Internet is €15.22 based on the dividend discount model

• The current share price of €20.00 suggests that United Internet may be 31% overvalued

• Our fair value estimate is 47% below United Internet’s analyst price target of €28.85

Does United Internet AG’s (ETR:UTDI) share price in June reflect what it’s really worth? Today we’re going to estimate the stock’s intrinsic value by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we’ll use to do this. Before you think you can’t understand it, just keep reading! 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 DCF, has advantages and disadvantages in certain scenarios. 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 United Internet

Processing the numbers

Because United Internet operates in the telecommunications sector, we need to calculate intrinsic value a little differently. Rather than using free cash flows, which are difficult to estimate and often unreported by analysts in this industry, we use dividend payments per share (DPS). Unless a company pays out the majority of its free cash flow as dividends, this method will typically underestimate the value of the stock. We use the Gordon Growth Model, which assumes the dividend will grow at a sustainable rate over time. The dividend is expected to grow at an annual growth rate equal to the 5-year average of the 10-year Treasury bond yield of 0.7%. We then discount this figure to today’s value at a cost of equity of 4.4%. Relative to the current share price of €20.0, the company appears quite expensive at the time of writing. The assumptions in each calculation have a big impact on the valuation, so it’s better to consider this a rough estimate that isn’t accurate to the last cent.

Value per share = Expected dividend per share / (Discount rate – Perpetual growth rate)

= 0.6€ / (4.4% – 0.7%)

= 15,2 €

The assumptions

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 does not take into account the potential 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 United Internet 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 4.4%, 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.

The story goes on

SWOT analysis for United Internet

Strength

weakness

Opportunity

Danger

Looking ahead:

While a company’s valuation is important, it shouldn’t be the only metric you consider when researching a company. It’s not possible to get a foolproof valuation using a DCF model. A better way would be to apply different cases and assumptions and see how they would affect the company’s valuation. If a company grows at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome may look very different. Can we find out why the company is trading at a premium to intrinsic value? For United Internet, we’ve put together three more points for you to look at:

1. Risks: Please note that United Internet 3 warning signals in our investment analysis you should know about…

2. Future income: How does UTDI’s growth rate compare to its 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. The Simply Wall St app runs a discounted cash flow valuation for every stock in the XTRA 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 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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