Key Insights
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Using the 2 Stage Free Cash Flow to Equity, Comet Holding fair value estimate is CHF175
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Current share price of CHF202 suggests Comet Holding is potentially trading close to its fair value
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Analyst price target for COTN is CHF232, which is 33% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of Comet Holding AG ( VTX:COTN ) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!
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 .
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. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (CHF, Millions) |
CHF32.9m |
CHF59.9m |
CHF63.0m |
CHF65.2m |
CHF66.8m |
CHF68.1m |
CHF69.1m |
CHF69.9m |
CHF70.6m |
CHF71.2m |
| Growth Rate Estimate Source |
Analyst x3 |
Analyst x3 |
Analyst x1 |
Est @ 3.42% |
Est @ 2.54% |
Est @ 1.93% |
Est @ 1.50% |
Est @ 1.19% |
Est @ 0.98% |
Est @ 0.84% |
| Present Value (CHF, Millions) Discounted @ 5.3% |
CHF31.2 |
CHF54.0 |
CHF53.9 |
CHF53.0 |
CHF51.6 |
CHF49.9 |
CHF48.1 |
CHF46.2 |
CHF44.3 |
CHF42.4 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= CHF475m
The second stage is also known as Terminal Value, this is the business's cash flow after 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 0.5%. We discount the terminal cash flows to today's value at a cost of equity of 5.3%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = CHF71m× (1 + 0.5%) ÷ (5.3%– 0.5%) = CHF1.5b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CHF1.5b÷ ( 1 + 5.3%)10= CHF883m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF1.4b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of CHF202, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Comet Holding 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 5.3%, which is based on a levered beta of 1.146. 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 Comet Holding
SWOT Analysis for Comet Holding
Strength
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Earnings growth over the past year exceeded the industry.
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Debt is not viewed as a risk.
Weakness
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Dividend is low compared to the top 25% of dividend payers in the Electronic market.
Opportunity
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Annual earnings are forecast to grow faster than the Swiss market.
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Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
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Revenue is forecast to grow slower than 20% per year.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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 Comet Holding, we've compiled three relevant elements you should assess:
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Risks: For instance, we've identified 1 warning sign for Comet Holding that you should be aware of.
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Future Earnings: How does COTN'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 .
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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. Simply Wall St updates its DCF calculation for every Swiss stock every day, so if you want to find the intrinsic value of any other stock 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.
