The intrinsic value of Aston Martin Lagonda Global Holdings plc (LON: AML) may be 26% below its share price

Today we’re going to go over one way to estimate the intrinsic value of Aston Martin Lagonda Global Holdings plc (LON: AML) by taking expected future cash flows and discounting them to their present value. Our analysis will use the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually very simple!

We point out that there are many ways to evaluate a company and, as with DCF, each method has advantages and disadvantages in certain scenarios. If you would like to find out more about the discounted cash flow, you can read the background of this calculation in detail in the Simply Wall St analysis model.

Check out our latest analysis for Aston Martin Lagonda Global Holdings

What is the estimated value?

We’re going to be using a two-tier DCF model that, as the name suggests, takes into account two stages of growth. The first phase is generally a higher growth phase that flattens out towards the final value captured in the second phase of “steady growth”. First, we need to estimate the cash flows for the next ten years. We use analyst estimates wherever possible, but when these are not available we extrapolate the previous free cash flow (FCF) from the most recent estimate or reported value. We assume that companies with falling free cash flow will slow their rate of contraction and that companies with increasing 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 first few years than in later years.

In general, we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to get a present value estimate:

Free cash flow (FCF) estimate for 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = £ 469m

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 beyond the first tier. The Gordon growth formula is used to calculate the terminal value using a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 0.9%. We discount the terminal cash flows to today’s value using a cost of equity rate of 12%.

Final value (TV)= FCF₂₀₃₁ × (1 + g) ÷ (r – g) = UK £ 386m × (1 + 0.9%) ÷ (12% -0.9%) = UK £ 3.7 billion

Present value of the final value (PVTV)= TV / (1 + r)¹⁰= UK £ 3.7b ÷ (1 + 12%)¹⁰= UK £ 1.2bn

The total value or equity value is then the sum of the present value of future cash flows which in this case is £ 1.7 billion. The final step is to divide the stock value by the number of shares outstanding. Compared to its current share price of £ 19.6, the company looks quite expensive at the time of writing. Ratings, however, are inaccurate instruments, much like a telescope – move a few degrees and land in a different galaxy. Keep this in mind.

Important assumptions

The above calculation depends heavily on two assumptions. The first is the discount rate and the other is the cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and review your own assumptions. The DCF also does not take into account the possible cyclical nature of an industry or the future capital requirements of a company, so that it does not provide a complete picture of the potential performance of a company. Since we consider Aston Martin Lagonda Global Holdings to be 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 accounts for debt. In this calculation we used 12% which is based on a leveraged beta of 2,000. Beta is a measure of the volatility of a stock compared to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit between 0.8 and 2.0, which is a reasonable range for stable business.

Next Steps:

While rating a company is important, it shouldn’t be the only metric you consider when looking for a company. The DCF model is not a perfect tool for stock valuation. The best thing to do is to apply different cases and assumptions and see how they affect the business valuation. For example, if the terminal value growth rate is adjusted slightly, it can change the overall result dramatically. What is the reason that the share price exceeds the intrinsic value? For Aston Martin Lagonda Global Holdings we have put together three relevant aspects that you should evaluate:

1. Risks: Take risks, for example – Aston Martin has Lagonda Global Holdings 2 warning signs We think you should be aware of this.
2. Future income: What is AML’s growth rate compared to competitors and the broader market? Learn more about analyst consensus numbers for the years to come by interacting with our free analyst growth expectations chart.
3. Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of quality stocks to get an idea of ​​what else you might be missing!

PS. The Simply Wall St app performs a discounted cash flow assessment for every share on the LSE on a daily basis. If you want to find the calculation for other stocks, just search here.

This article from Simply Wall St is of a general nature. We only provide comments based on historical data and analyst projections using an unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your goals or your financial situation. Our goal is to provide you with long-term, focused analysis based on fundamentals. Note that our analysis may not take into account the latest company announcements or quality material, which may be sensitive to the price. Simply Wall St has no position in the stocks mentioned.

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