nVent Electric's estimated fair value is US$61.52 based on 2 Stage Free Cash Flow to Equity
nVent Electric is estimated to be 23% overvalued based on current share price of US$75.89
Analyst price target for NVT is US$85.00, which is 38% above our fair value estimate
In this article we are going to estimate the intrinsic value of nVent Electric plc (NYSE:NVT) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
What's The Estimated Valuation?
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$508.7m
US$542.4m
US$641.0m
US$690.3m
US$732.4m
US$768.8m
US$801.1m
US$830.4m
US$857.6m
US$883.3m
Growth Rate Estimate Source
Analyst x4
Analyst x3
Analyst x1
Est @ 7.69%
Est @ 6.10%
Est @ 4.98%
Est @ 4.20%
Est @ 3.65%
Est @ 3.27%
Est @ 3.00%
Present Value ($, Millions) Discounted @ 9.0%
US$467
US$456
US$495
US$489
US$476
US$458
US$438
US$416
US$394
US$373
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$4.5b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 9.0%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$14b÷ ( 1 + 9.0%)10= US$5.8b
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$10b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$75.9, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 nVent Electric 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 9.0%, which is based on a levered beta of 1.210. 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 nVent Electric
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings and cashflows.
Dividends are covered by earnings and cash flows.
Dividend information for NVT.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Electrical market.
Expensive based on P/E ratio and estimated fair value.
Opportunity
NVT's financial characteristics indicate limited near-term opportunities for shareholders.
Threat
Annual earnings are forecast to decline for the next 3 years.
What else are analysts forecasting for NVT?
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Why is the intrinsic value lower than the current share price? For nVent Electric, we've put together three relevant factors you should assess:
Risks: For instance, we've identified 3 warning signs for nVent Electric (1 doesn't sit too well with us) you should be aware of.
Future Earnings: How does NVT'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 NYSE 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
根據兩階段的股本自由現金流,nVent Electric 的公允價值估計爲 61.52 美元
根據目前75.89美元的股價,nVent Electric的估值估計被高估了23%
分析師對NVT的目標股價爲85.00美元,比我們的公允價值估計高出38%
在本文中,我們將通過計算預期的未來現金流並將其折現爲現值來估算nVent Electric plc(紐約證券交易所代碼:NVT)的內在價值。我們的分析將採用貼現現金流(DCF)模型。在你認爲自己無法理解之前,請繼續閱讀!實際上,它沒有你想象的那麼複雜。
我們普遍認爲,公司的價值是其未來將產生的所有現金的現值。但是,差價合約只是衆多估值指標中的一個,而且並非沒有缺陷。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。