Are Investors Undervaluing Fluor Corporation (NYSE: FLR) 25%?

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<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Today we perform a simple run through through a valuation method to estimate the attractiveness of the Fluor Corporation (NYSE: FLR) as an investment opportunity by discounting the expected future cash flows to their current value. I will use the Discounted Cash Flow (DCF) model. Don't be put off by the technical language, the math behind it is actually quite simple. "Data-reactid =" 27 "> Today we're going to do a simple review of a valuation method that assesses the attractiveness of Fluor Corporation (NYSE: FLR) as an investment opportunity by discounting expected future cash flows to today's value I'm going to use the Discounted Cash Flow (DCF) model. Don't be put off by the jargon, the math behind it is actually quite simple.

<p class = "canvas-atom canvas-text MB (1.0em) MB (0) – SM MB (0.8em) – SM" type = "text" content = "However, note that there are many ways to appreciate The The value of a company and a DCF are just one method. If you want to know more about the discounted cash flow, you can read the reasons for this calculation in detail in the Simply Wall St analysis model, "data-reactid =" 28 "> However, keep in mind that there are many ways to appreciate a company's value, and a DCF is just one method, and if you want to learn more about discounted cash flow, you can understand why Specify the calculation Read the details in the Simply Wall St analysis model.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Check out our latest analysis for fluorine "data-reactid =" 29 "> Check out our latest analysis for fluorine

Is fluorine rated fairly?

We're going to use a two-stage DCF model that, as the name suggests, takes into account two stages of growth. The first phase is generally a longer growth phase that focuses on the final value and is recorded in the second phase of "steady growth". First of all, we have to estimate the cash flows of the next ten years. Wherever possible, we use analyst estimates. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the most recent estimate or the most recently reported value. We expect companies with shrinking free cash flow to slow down their rate of shrinkage and that companies with growing free cash flow will slow down their growth rate during this period. We do this to take into account that growth tends to slow down more in the early years than in later years.

In general, we assume that a dollar is more valuable today than a dollar in the future. Therefore, we discount the value of these future cash flows to the estimated value in today's dollars:

Estimation of 10-year free cash flow (FCF)

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
FCF Leverage ($ million) -US $ 422.0 million $ 194.5 million $ 241.0 million $ 282.5 million $ 318.1 million $ 347.8 million $ 372.3 million $ 392.7 million $ 409.7 million $ 424.3 million
Growth rate Estimated source Analyst x3 Analyst x2 Est @ 23.89% Est @ 17.24% Est @ 12.59% Estimate at 9.34% Est @ 7.06% Est @ 5.46% Est @ 4.35% Est @ 3.56%
Present value ($. Million) reduced at 9.5% -US $ 385.5 $ 162 $ 184 $ 197 $ 202 $ 202 $ 198 $ 191 $ 182 $ 172

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "("Est" = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = $ 1.3 billion data reactid = 36("Est" = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = $ 1.3 billion

We now have to calculate the final value, which takes into account all future cash flows after this ten-year period. The Gordon growth formula is used to calculate the final value with a future annual growth rate that corresponds to the 10-year government bond rate of 1.7%. We discount the terminal cash flows with 9.5% equity costs to today's value.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Terminal value (TV)= FCF2029 × (1 + g) ÷ (r – g) = US $ 424m × (1 + 1.7%) ÷ 9.5% – 1.7%) = US $ 5.6b data reactide = "38">Terminal value (TV)= FCF2029 × (1 + g) ÷ (r – g) = USD 424 million × (1 + 1.7%) ÷ 9.5% – 1.7%) = USD 5.6 b

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Present value of the final value (PVTV)= TV / (1 + r)10= $ 5.6 billion (1 + 9.5%)10= US $ 2.3b "data-reactid =" 39 ">Present value of the final value (PVTV)= TV / (1 + r)10= $ 5.6 billion (1 + 9.5%)10= $ 2.3 billion

The total value or equity value is then the sum of the present value of future cash flows, which in this case is USD 3.6 billion. In the last step, we divide the equity value by the number of shares issued. Compared to the current share price of $ 19.2, the company appears to be undervalued at a discount of 25% compared to the current share price. The assumptions in each calculation have a major impact on the rating. It is therefore better to consider this as a rough estimate that is not accurate to the last cent.

NYSE: FLR Intrinsic Value, January 3, 2020

The assumptions

The above calculation is heavily dependent on two assumptions. The first is the discount rate and the other is the cash flow. If you disagree with this result, try the calculation yourself and play with the assumptions. The DCF also does not take into account the potential cyclicality of an industry or the future capital requirements of a company and therefore does not provide a complete overview of a company's potential performance. Given that we consider Fluor to be potential shareholders, the cost of equity is used as the discount rate, not the cost of capital (or weighted average cost of capital, WACC) that make up debt. We used 9.5% in this calculation, which is based on an indebted beta of 1.418. Beta is a measure of the volatility of a share compared to the overall market. We get our beta from the industry-standard beta of globally comparable companies with a defined limit between 0.8 and 2.0, which is an appropriate range for stable business.

Next Steps:

Valuation is just one side of the coin in creating your investment thesis and shouldn't be the only metric you consider when researching a company. The DCF model is not a perfect tool for stock valuation. Rather, it should serve as a guide to "What assumptions must be made for this stock to be under or overvalued?" If a company grows at a different growth rate or if the cost of equity or risk-free interest rates changes significantly, the output can look very different. What is the reason why the stock price differs from the intrinsic value? For fluorine, I have put together three additional factors to look out for:

  1. Financial health: Does FLR have a healthy record? Check out our free balance sheet analysis with six simple reviews of key factors such as leverage and risk.
  2. Future result: What is the growth rate of FLR compared to its competitors and the overall market? Find out more about analyst consensus numbers for the coming years by accessing our free graph of analyst growth expectations.
  3. Other high quality alternatives: Are there any other high quality stocks you could hold instead of FLR? Check out our interactive list of high quality stocks to get an idea of ​​what else is missing!

<p class = "Canvas-Atom Canvas-Text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "PS. The Simply Wall St app has a discounted price Cash flow valuation for each share on the NYSE every day if you just want to find the calculation for other stocks Search here, "data-reactid =" 65 "> PS. The Simply Wall St app performs a discounted cash flow assessment for each share on the NYSE daily. If you want to find the calculation for other shares, just search here.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com, This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading."data-reactid =" 66 ">If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.