How far off is Crescent Point Energy (NYSE:CPG) to its intrinsic value? I am going to take a look now by taking the expected future cash flows and discounted them to the value today. Discounted cash flow (DCF) is a valuation method used to estimate the attractiveness of an investment opportunity by taking the expected Future Cash Flows and discounting them to their present valye. It sounds complicated, but actually it is quite simple!
Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
If you are reading this and its not September 2017 then I highly recommend you check out the latest calculation for Crescent Point Energy by following the link below. View our latest analysis for Crescent Point Energy
We are going to use a two stage model that takes into account two stages of growth. The first stage may have a high growth rate and the second stage is usually assumed to have a stable growth rate. In the 1st stage we need to estimate the cash flows to the business over the next 5 years, for this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
Step by step through the calculation
Note the numbers here are in millions apart from the per share values.
5-year cash flow forecast
|Levered FCF (CAD, Millions)||$87.00||$181.00||$844.00||$1,190.00||$1,056.00|
|Source||Analyst x1||Analyst x1||Analyst x2||Analyst x1||Analyst x1|
|Present Value Discounted @ 17.67%||$73.94||$130.72||$518.02||$620.70||$468.10|
Present value of next 5 years cash flows: $1,811
After calculating the present value of cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the 1st stage. For a number of reasons a very conservative rate is used that cannot exceed that of the GDP. In this case I have used the 10 year government bond rate (2.3%). In the same way as with the 5 year ‘growth’ period we discount this to today’s value.
Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)
Terminal Value = $1,056 × (1 + 2.3%) ÷ (17.7% – 2.3%)
Terminal value based on the Perpetuity Method where growth (g) = 2.3%: $7,044
Present value of terminal value: $3,123
So the total value is the sum of the next 5 years cash flows and the terminal value discounted to today, this is known as the Equity Value.
Equity Value (Total value) = Present value of next 5 years cash flows + terminal value = $1,811 + $3,123 = $4,934
The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number.
Value = Total value / Shares Outstanding ($4,934.05 / 544.38)
Value per share (CAD): $9.06
Exchange rate CAD /USD = 0.807
Value per share (USD): $7.31
Now when we compare the intrinsic value of 7.31 to the current share price of $6.93 we see Crescent Point Energy (NYSE:CPG) is a touch undervalued at a 5% discount to what it is available for right now.
I’d like to point out that 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Crescent Point Energy as potential investors the Cost of Equity is used as the discount rate, not the Cost of Capital (or Weighed Average Cost of Capital/ WACC) which accounts for debt.
In this calculation I’ve used 17.7% and this is based on a Levered Beta of 2. I’m not going to go into how I calculate the Levered Beta in detail, I used the ‘Bottom up Beta’ method based on the comparable businesses, I also impose a limit between 0.8 and 2 which is a reasonable range for a stable business. Google this if you want to learn more.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. Is Crescent Point Energy in a healthy financial condition? What is the reason for the share price to differ from the intrinsic value? See our latest FREE analysis to find out!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for another other stock just search here.
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