Estimating the Intrinsic Valuation Of Daimler Truck Holding AG. (ETR:DTG).

How far away is Daimler Truck Holding AG, ETR:DTG from its intrinsic worth? We’ll use the most recent financial data to determine if the stock is fair priced. This will be done by estimating future cash flows for the company and then discounting them to their current value. Our analysis will use the Discounted cash flow (DCF). These models may seem complicated, but they are easy to understand.

It is important to remember that there are many methods of estimating a company’s value. A DCF is one example. You can read the Simply Wall St analysis model to understand more about discounted cash flows.

Check out our latest analysis of Daimler Truck Holdings

Crunching the Numbers

We will use a 2-stage DCF model that, as the name suggests, takes into consideration two stages of growth. The first stage, which is generally a longer period of high growth, ends up heading towards the terminal value. This second’steady-growth’ period begins. The first stage requires us to estimate the cash flows to our business over the next ten-years. We use analyst estimates whenever possible. However, if these are not available, we extrapolate the previous cash flow (FCF), from the last estimate or reported amount. We assume that companies with declining free cash flow will slow down their rate of shrinkage. Companies with growing free cash flows will see a slowing in their growth rate over this period. This is to show that growth tends slow to the early years more than it does later in life.

We assume that a dollar is more valuable today than it will be in the future. To arrive at a present-value estimate, we must discount the sums of future cash flows.

Estimate of the 10-year free cash flow for (FCF).

(“Est”) = FCF growth rate calculated by Simply Wall St
Present Value of 10-year Cash Flows (PVCF). = €12b

After calculating the current value of future cash flow over the initial 10-year period we need to calculate Terminal Value. This accounts for all future cash flow beyond the first stage. The Terminal Value is calculated using the Gordon Growth formula. It uses a future annual growth rate equal the 5-year average of the 10-year yield on government bonds of 0.03%. We use a cost-of-equity of 6.4% to discount the terminal cash flows and convert them to today’s worth.

Terminal Value (TV).= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = €1.3b× (1 + 0.03%) ÷ (6.4%– 0.03%) = €21b

Present Value of the Terminal Value (PVTV).= TV / (1+ r)¹⁰= €21b÷ ( 1 + 6.4%)¹⁰= €11b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is €24b. Divide the number of shares outstanding by this figure to get the intrinsic value per share. Relative to the current share price of €26.9, the company appears about fair value at a 6.2% discount to where the stock price trades currently. But remember that this is an approximate valuation and, like any complicated formula, garbage in, garbage out.

Important Assumptions

Two assumptions are key to the above calculation. The first is the discount rate, and the second is the cash flows. These inputs are not mandatory. I recommend you redo the calculations yourself and having fun with them. The DCF does not take into account the potential cyclicality or future capital requirements of an industry. It does not provide a complete picture of a company’s potential performance. Daimler Truck Holding is being considered as potential shareholders. Therefore, the cost to equity is used as the discount rate. It does not take into account the cost capital (or the weighted average capital cost, WACC), which accounts for debt. We used 6.4%, based on a leveraged beta of 1.362. Beta is a measure that measures a stock’s volatility in relation to the overall market. Our beta is calculated from the industry average beta for globally comparable companies. We have imposed a limit between 0.8 to 2.0 which is a reasonable range considering that a stable business requires stability.

SWOT Analysis of Daimler Truck Holdings

Moving on:

When building your investment thesis, valuation is only one aspect. It should not be the only piece of analysis that you examine for a company. The DCF model does not provide a perfect method for stock valuation. It is preferable to use different assumptions and cases to see how they impact the company’s valuation. If a company’s growth rate is different or if the cost of equity or risk-free rate rises rapidly, it can have a very different output. Three factors are important to consider when analyzing Daimler Truck Holding:

1. Risques: Take risks – Daimler Truck Holdings has 1 warning sign We think you should be aware.
2. Future Earnings: How does DTG compare to its peers, and the wider market? Use our free analyst growth forecast chart to get a deeper understanding of the consensus number for the next years.
3. Other high-quality alternatives: Are you looking for a great all-rounder? Take a look at our interactive list high-quality stocks to see what else you might be missing!

PS. Simply Wall St updates its DCF calculation every day for every German stock. You can search here to find the intrinsic values of any other stock.

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This article is by Simply Wall St. It is general in nature. Our commentary is based on historical data and analyst projections. We do not intend to provide financial advice. It does not make a recommendation to buy, sell, or trade any stock. It also does not take into account your financial goals or financial situation. We are committed to providing you with long-term focused analysis that is based on fundamental data. Our analysis may not take into account the most recent price-sensitive company announcements and qualitative material. Simply Wall St holds no position in any of these stocks.