Estimated Fair Value of AptarGroup, Inc. (NYSE: ATR)
How far is AptarGroup, Inc. (NYSE: ATR) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock’s price is fair by projecting its future cash flows and then discounting them to today’s value. One way to do this is to use the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!
Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something that interests you.
Check out our latest analysis for AptarGroup
The calculation
We use the 2-step growth model, which simply means that we take into account two stages of business growth. In the initial period, the business can have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated 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 down more in the early years than in subsequent years.
In general, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year Free Cash Flow (FCF) estimate
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF ($, Millions) | 228.4 million US dollars | US $ 284.5 million | US $ 339.0 million | US $ 364.5 million | US $ 383.7 million | US $ 400.1 million | US $ 414.4 million | US $ 427.2 million | US $ 438.9 million | US $ 450.0 million |
Source of estimated growth rate | Analyst x5 | Analyst x2 | Analyst x2 | Analyst x2 | East @ 5.26% | East @ 4.27% | Is @ 3.58% | Est @ 3.09% | East @ 2.75% | Is 2.51% |
Present value (in millions of dollars) discounted at 5.7% | $ 216 | $ 255 | US $ 287 | US $ 292 | 291 USD | US $ 287 | US $ 281 | US $ 275 | US $ 267 | US $ 259 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 2.7 billion
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. 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 used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 5.7%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = US $ 450 million × (1 + 2.0%) ÷ (5.7% – 2.0%) = US $ 12 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= US $ 12 billion ÷ (1 + 5.7%)^{ten}= 7.1 billion US dollars
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 9.8 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current share price of $ 122, the company appears to be roughly at fair value with an 18% discount from the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flow. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play with them. 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 full picture of a company’s potential performance. Since we view AptarGroup 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 takes into account debt. In this calculation, we used 5.7%, which is based on a leveraged beta of 0.849. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Looking forward:
Valuation is only one side of the coin in terms of building your investment thesis, and ideally, it won’t be the only piece of analysis you look at for a business. It is not possible to achieve a rock-solid valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. For AptarGroup, there are three basic things you should research further:
- Risks: To do this, you need to know the 2 warning signs we spotted with AptarGroup.
- Future benefits: How does ATR’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you might not have considered!
PS. Simply Wall St updates its DCF calculation for every US stock every day, 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 using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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