Using the 2 Stage Free Cash Flow to Equity, Weatherford International fair value estimate is US$133
Current share price of US$94.89 suggests Weatherford International is potentially 29% undervalued
The US$117 analyst price target for WFRD is 12% less than our estimate of fair value
How far off is Weatherford International plc (NASDAQ:WFRD) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
Check out our latest analysis for Weatherford International
What's The Estimated Valuation?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$607.2m
US$673.4m
US$826.5m
US$853.0m
US$876.0m
US$898.4m
US$920.5m
US$942.4m
US$964.4m
US$986.6m
Growth Rate Estimate Source
Analyst x5
Analyst x4
Analyst x2
Analyst x2
Est @ 2.70%
Est @ 2.56%
Est @ 2.45%
Est @ 2.38%
Est @ 2.34%
Est @ 2.30%
Present Value ($, Millions) Discounted @ 10%
US$550
US$553
US$615
US$575
US$535
US$497
US$461
US$428
US$397
US$368
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$5.0b
We now need to calculate the Terminal Value, which accounts for all the 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 have used the 5-year average of the 10-year government bond yield (2.2%) 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 10%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$12b÷ ( 1 + 10%)10= US$4.6b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$9.6b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$94.9, the company appears a touch undervalued at a 29% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Weatherford International 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 accounts for debt. In this calculation we've used 10%, which is based on a levered beta of 1.630. Beta is a measure of a stock's volatility, compared to the market as a whole. 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 a stable business.
SWOT Analysis for Weatherford International
Strength
Debt is well covered by earnings and cashflows.
Balance sheet summary for WFRD.
Weakness
Shareholders have been diluted in the past year.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Trading below our estimate of fair value by more than 20%.
Threat
Annual revenue is forecast to grow slower than the American market.
What else are analysts forecasting for WFRD?
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For Weatherford International, there are three fundamental elements you should further examine:
Risks: We feel that you should assess the 2 warning signs for Weatherford International we've flagged before making an investment in the company.
Future Earnings: How does WFRD's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
關鍵見解
使用兩階段自由現金流轉股權,韋瑟福德國際的公允價值估計爲133美元
目前的股價爲94.89美元,表明韋瑟福德國際的估值可能被低估了29%
WFRD的分析師目標股價爲117美元,比我們對公允價值的估計低12%
Weatherford International plc(納斯達克股票代碼:WFRD)距離其內在價值有多遠?使用最新的財務數據,我們將通過預測股票未來的現金流,然後將其折現爲今天的價值,來研究該股的定價是否公平。這次我們將使用折扣現金流 (DCF) 模型。不要被行話推遲,它背後的數學其實很簡單。
公司可以在很多方面得到估值,因此我們要指出,DCF並不適合所有情況。任何有興趣進一步了解內在價值的人都應該讀一讀 Simply Wall St 分析模型。