Does the June price of the Interparfums SA (EPA:ITP) share reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by projecting its future cash flows and then discounting them to the present value. This will be done using the discounted cash flow (DCF) model. There really isn’t much to do, although it may seem quite complex.

We draw your attention to the fact that there are many ways to value a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have burning questions about this type of assessment, take a look at Simply Wall St.’s analysis template.

Check out our latest analysis for Interparfums

The calculation

We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, and so the sum of these future cash flows is then discounted to today’s value:

Estimated free cash flow (FCF) over 10 years

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leveraged FCF (€, Millions) €71.9 million €76.4 million €86.1 million €92.8 million €97.9 million €101.8 million €104.7 million €106.9 million €108.5 million €109.8 million
Growth rate estimate Source Analyst x4 Analyst x4 Analyst x4 Is at 7.76% Is at 5.52% Is at 3.96% Is at 2.86% Is at 2.09% Is at 1.55% Is at 1.18%
Present value (€, millions) discounted at 5.1% 68.4 € 69.1 € 74.1 € €76.0 76.3 € 75.4 € 73.8 € 71.7 € 69.2 € 66.6 €

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = €720 million

The second stage is also known as the terminal value, it is the cash flow of the business after the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (0.3%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 5.1%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = €110M × (1 + 0.3%) ÷ (5.1%– 0.3%) = €2.3B

Present value of terminal value (PVTV)= TV / (1 + r)ten= €2.3 billion÷ ( 1 + 5.1%)ten= €1.4 billion

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is 2.1 billion euros. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of €48.7, the company appears potentially overvalued at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.

ENXTPA: ITP discounted cash flows June 11, 2022

Important assumptions

We emphasize that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you disagree with these results, try the math yourself and play around with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Interparfums as a potential shareholder, the cost of equity is used as the discount rate, and not the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 5.1%, which is based on a leveraged beta of 1.019. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Let’s move on :

Valuation is only one side of the coin in terms of crafting your investment thesis, and 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. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, changes in the company’s cost of equity or in the risk-free rate can have a significant impact on the valuation. What is the reason why the stock price exceeds the intrinsic value? For Interparfums, there are three relevant elements to explore further:

  1. Risks: Every business has them, and we’ve spotted 3 warning signs for Interparfums (1 of which is a little unpleasant!) that you should know about.
  2. Future earnings: How does ITP’s growth rate compare to its peers and the broader market? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
  3. Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of ​​what you might be missing!

PS. Simply Wall St updates its DCF calculation for every French stock daily, so if you want to find the intrinsic value of any other stock, just search here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.