The intrinsic value of Siemens Aktiengesellschaft (ETR:SIE) is potentially 58% above the share price

Key findings

• The estimated fair value of Siemens is €269 based on the 2-step Free Cash Flow to Equity
• Siemens’ share price of 170 euros suggests that the company could be undervalued by 37 percent
• Our fair value estimate is 37% above Siemens’ analyst price target of €197

Today we’ll go through one way to estimate the intrinsic value of Siemens Aktiengesellschaft (ETR:SIE) by taking the expected future cash flows and discounting them to their present value. One way to do this is to apply the discounted cash flow (DCF) model. Before you think you can’t understand it, just keep reading! It’s actually a lot less complex than you think.

However, keep in mind that there are many ways to estimate the value of a company, and a DCF is just one method. If you still have pressing questions about this type of valuation, take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Siemens

The model

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 obtain estimates of 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.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

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) = 77 billion euros

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. For various reasons, a very conservative growth rate is used that cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (0.7%) 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 5.5%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = 11 billion euros × (1 + 0.7%) ÷ (5.5% – 0.7%) = 227 billion euros

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= €227 billion ÷ ( 1 + 5.5 %)¹⁰= 134 billion euros

The 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 €211 billion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of €170, the company appears quite undervalued at a 37% 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

We would like to point out that the main inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you disagree with these results, try the calculation yourself and play with the assumptions. The DCF also does not take into account the possible 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 Siemens 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 5.5%, which is based on a leveraged beta of 1.040. 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 Siemens

Go on:

Valuation is only one side of the coin when developing your investment thesis and ideally should not be the only analysis you look at for a company. The DCF model is not a perfect tool for stock valuation. Rather, you should apply different cases and assumptions and see how they affect the valuation of the company. For example, slightly adjusting the growth rate of the terminal value can change the overall result dramatically. Why is the intrinsic value higher than the current share price? For Siemens, we have compiled three key points that you should investigate further:

1. Risks: Consider, for example, the ever-present specter of investment risk. We have identified 1 warning signal with Siemens, and understanding this should be part of your investment process.
2. Future income: How is SIE’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: 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 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 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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