Estimate of the intrinsic value of Christian Dior SE (EPA: CDI)
What is the distance between Christian Dior SE (EPA: CDI) and its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by taking expected future cash flows and discounting them to today’s value. Our analysis will use the discounted cash flow (DCF) model. There really isn’t much to it, although it might seem quite complex.
We generally think of a business’s value as the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. If you want to know more about discounted cash flows, the rationale for this calculation can be read in detail in the Simply Wall St analysis model.
See our latest analysis for Christian Dior
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. To begin with, we need to estimate the next ten years of cash flow. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
10-year Free Cash Flow (FCF) estimate
|Leverage FCF (€, Millions)||€ 8.00||7.89 billion euros||7.82 billion euros||7.79 billion euros||7.77 billion euros||7.77 billion euros||7.77 billion euros||7.78 billion euros||€ 7.80 billion||7.82 billion euros|
|Source of growth rate estimate||East @ -2.08%||Is @ -1.35%||East @ -0.84%||East @ -0.48%||East @ -0.23%||East @ -0.05%||Is 0.07%||Is 0.16%||Est @ 0.22%||Is @ 0.26%|
|Present value (€, Millions) discounted @ 6.4%||€ 7.5k||€ 7.0k||€ 6.5k||€ 6.1K||€ 5.7k||€ 5.4k||€ 5.0k||€ 4.7k||€ 4.5K||€ 4.2k|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = € 57bn
The next step is to calculate the Terminal Value, which takes into account all future cash flows after this ten-year period. For a number of reasons, a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (0.4%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 6.4%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = € 7.8bn × (1 + 0.4%) ÷ (6.4% – 0.4%) = € 130bn
Present value of terminal value (PVTV)= TV / (1 + r)ten= € 130bn ÷ (1 + 6.4%)ten= € 70bn
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the Total Equity Value, which in this case is 127 billion euros. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current price of 686 €, the company appears at fair value with a discount of 2.3% compared to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. If you don’t agree 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 the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we consider Christian Dior as a potential shareholder, 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 6.4%, which is based on a leveraged beta of 1.159. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
To move on :
While important, calculating DCF shouldn’t be the only metric you look at when looking for a business. The DCF model is not a perfect equity valuation tool. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. For Christian Dior, we have compiled three relevant factors that you need to assess:
- Risks: To do this, you need to know the 1 warning sign we spotted with Christian Dior.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you might not have considered!
- Other picks from top analysts: Interested in seeing what analysts think? Take a look at our interactive list of analysts’ top stock picks to find out what they think might have a compelling outlook for the future!
PS. Simply Wall St updates its DCF calculation for every French stock every day, so if you want to find the intrinsic value of another stock just search here.
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This Simply Wall St article is general in nature. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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