Flex Ltd. (NASDAQ:FLEX) shares could be 30% below their estimated intrinsic value

Key findings

• The estimated fair value of Flex is $42.94 based on 2-step free cash flow to equity
• Flex’s share price of $29.95 suggests the company may be undervalued by 30%
• Our fair value estimate is 30% above Flex’s analyst price target of $33.07.

Today we’re going to go over one way to estimate the intrinsic value of Flex Ltd. (NASDAQ:FLEX) by taking the expected future cash flows and discounting them to today’s value. We’re going to use the Discounted Cash Flow (DCF) model on this occasion. Models like these may seem incomprehensible to a layman, but they’re pretty simple to understand.

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 Flex

Is Flex fairly valued?

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:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 7.0 billion US dollars

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value that takes into account all future cash flows after the first period. 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 8.2%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = 1.3 billion US dollars × (1 + 2.4%) ÷ (8.2% – 2.4%) = 22 billion US dollars

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 22 billion US dollars ÷ (1 + 8.2%)¹⁰= 10 billion US dollars

The total value or equity value is then the sum of the present value of future cash flows, which in this case is $17 billion. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of $30.00, the company seems to have quite good value for money at a 30% discount to the current share price. 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.

Important assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing with them. The DCF also doesn’t take into account the possible 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 Flex 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 8.2%, which is based on a leveraged beta of 1.263. 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 Flex

Next Steps:

While important, the DCF calculation is just one of many factors you need to evaluate a company. DCF models are not the be-all and end-all of investment valuation. Rather, they should be viewed as a guide to “what assumptions need to hold for this stock to be under/overvalued.” If a company grows at a different rate, or if its cost of equity or risk-free rate changes significantly, the outcome can look very different. Why is intrinsic value higher than the current share price? For Flex, we’ve compiled three important elements for you to examine:

1. Risks: For example, we found 2 warning signs for Flex that you should know before investing here.
2. Future income: How does FLEX’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 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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