A look at the intrinsic value of Aeroports de Paris SA (EPA:ADP)

Key findings

• Using the 2-step free cash flow to equity, the estimated fair value of Aeroports de Paris is €101.
• Aeroports de Paris’ share price of 115 euros suggests that the stock is trading at a similar level to its estimated fair value
• Our fair value estimate is 25% below Aeroports de Paris analysts’ price target of €134.

How far is Aeroports de Paris SA (EPA:ADP) 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. To do this, we use the Discounted Cash Flow (DCF) model. Don’t be put off by the technical jargon, the math behind it is actually quite simple.

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. If you want to learn more about intrinsic value, you should take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Aéroports de Paris

Step by step through the calculation

We use the 2-stage growth model, which simply means that we consider two stages of company 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. First, we need to estimate the next ten years’ cash flows. 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.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. So 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) = 5.3 billion euros

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 (1.1%) 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 11%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = 1.2 billion euros × (1 + 1.1 %) ÷ (11 % – 1.1 %) = 13 billion euros

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= €13 billion ÷ (1 + 11%)¹⁰= 4.7 billion euros

The total value or equity value is then the sum of the present value of future cash flows, which in this case is €10.0 billion. In the final step, we divide the equity value by the number of shares outstanding. Compared to the current share price of €115, 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

The main 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 possible cyclicality of an industry or a company’s future capital needs, so it doesn’t give a complete picture of a company’s potential performance. Since we consider Aeroports de Paris 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 11%, which is based on a leveraged beta of 1.823. 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 Aéroports de Paris

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 way would be to apply different cases and assumptions and see how they would 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 Aéroports de Paris, we have compiled three relevant factors that you should evaluate:

1. Risks: For example, we found 2 warning signs for Aeroports de Paris (1 cannot be ignored!) that you should know before investing here.
2. Future income: How does ADP’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 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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