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Dana’s estimated fair value is US$27.54 based on 2 Stage Free Cash Flow to Equity
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Current share price of US$22.82 suggests Dana is potentially trading close to its fair value
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Analyst price target for DAN is US$26.43 which is 4.1% below our fair value estimate
Does the December share price for Dana Incorporated (NYSE:DAN) reflect what it’s really worth? Today, we will estimate the stock’s intrinsic value by taking the forecast future cash flows of the company and discounting them back to today’s value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they’re fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
We’re using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:
|
2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|
Levered FCF ($, Millions) |
US$225.1m |
US$260.3m |
US$277.4m |
US$291.5m |
US$304.6m |
US$317.3m |
US$329.6m |
US$341.7m |
US$353.9m |
US$366.2m |
|
Growth Rate Estimate Source |
Analyst x2 |
Analyst x2 |
Analyst x1 |
Est @ 5.07% |
Est @ 4.52% |
Est @ 4.14% |
Est @ 3.88% |
Est @ 3.69% |
Est @ 3.56% |
Est @ 3.47% |
|
Present Value ($, Millions) Discounted @ 12% |
US$202 |
US$209 |
US$200 |
US$188 |
US$176 |
US$165 |
US$153 |
US$142 |
US$132 |
US$123 |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.7b
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. 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 (3.3%) 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 12%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$366m× (1 + 3.3%) ÷ (12%– 3.3%) = US$4.6b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$4.6b÷ ( 1 + 12%)10= US$1.5b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$3.2b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$22.8, the company appears about fair value at a 17% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.
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 Dana 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 12%, which is based on a levered beta of 1.795. 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.
See our latest analysis for Dana
Strength
Weakness
Opportunity
Threat
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It’s not possible to obtain a foolproof valuation with a DCF model. 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. For example, changes in the company’s cost of equity or the risk free rate can significantly impact the valuation. For Dana, there are three further factors you should assess:
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Risks: Take risks, for example – Dana has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.
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Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for DAN’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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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.
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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.