Key Insights
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Using the 2 Stage Free Cash Flow to Equity, Givaudan fair value estimate is CHF4,302
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Givaudan's CHF3,570 share price indicates it is trading at similar levels as its fair value estimate
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Our fair value estimate is 7.4% higher than Givaudan's analyst price target of CHF4,005
Does the October share price for Givaudan SA ( VTX:GIVN ) 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. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model .
The Calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
| 2026 |
2027 |
2028 |
2029 |
2030 |
2031 |
2032 |
2033 |
2034 |
2035 |
|
|---|---|---|---|---|---|---|---|---|---|---|
| Levered FCF (CHF, Millions) |
CHF1.19b |
CHF1.22b |
CHF1.28b |
CHF1.50b |
CHF1.58b |
CHF1.64b |
CHF1.69b |
CHF1.72b |
CHF1.75b |
CHF1.78b |
| Growth Rate Estimate Source |
Analyst x8 |
Analyst x7 |
Analyst x2 |
Analyst x1 |
Est @ 5.43% |
Est @ 3.94% |
Est @ 2.89% |
Est @ 2.16% |
Est @ 1.65% |
Est @ 1.29% |
| Present Value (CHF, Millions) Discounted @ 4.6% |
CHF1.1k |
CHF1.1k |
CHF1.1k |
CHF1.3k |
CHF1.3k |
CHF1.3k |
CHF1.2k |
CHF1.2k |
CHF1.2k |
CHF1.1k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF)= CHF12b
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. 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 (0.4%) 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 4.6%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = CHF1.8b× (1 + 0.4%) ÷ (4.6%– 0.4%) = CHF43b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CHF43b÷ ( 1 + 4.6%)10= CHF28b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CHF40b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of CHF3.6k, the company appears about fair value at a 17% discount to where the stock price trades currently. 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
We would point out that 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 Givaudan 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 4.6%, which is based on a levered beta of 0.976. 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.
View our latest analysis for Givaudan
SWOT Analysis for Givaudan
Strength
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Debt is well covered by earnings and cashflows.
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Dividends are covered by earnings and cash flows.
Weakness
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Earnings growth over the past year underperformed the Chemicals industry.
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Dividend is low compared to the top 25% of dividend payers in the Chemicals market.
Opportunity
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Annual earnings are forecast to grow for the next 3 years.
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Current share price is below our estimate of fair value.
Threat
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Annual earnings are forecast to grow slower than the Swiss market.
Looking Ahead:
Whilst important, the DCF calculation 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. 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Givaudan, we've put together three additional factors you should further examine:
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Risks: For example, we've discovered 1 warning sign for Givaudan that you should be aware of before investing here.
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Future Earnings: How does GIVN'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.
