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Evaluating DEUTZ Aktiengesellschaft: A Comprehensive Financial Analysis

Projected Fair Value and Current Valuation

The estimated fair value for DEUTZ Aktiengesellschaft (ETR:DEZ) stands at an impressive €15.63, calculated using the two-stage Free Cash Flow to Equity model. This model takes into account multiple growth phases, ultimately reflecting the intrinsic potential of the company. Notably, DEUTZ appears to be 29% undervalued, given its current share price of €11.07.

Analysts also set the price target for DEZ at €11.22, which indicates a position about 28% below our calculated fair value estimate. This significant disparity provides an intriguing opportunity for potential investors who are seeking undervalued stocks.

Understanding the Intrinsic Value with Discounted Cash Flow (DCF)

In this article, we explore how to calculate the intrinsic value of DEUTZ by estimating the company’s future cash flows and discounting them to their present value. This calculation can effectively be executed using the Discounted Cash Flow (DCF) model. This method is surprisingly straightforward, and we aim to guide you through it in a digestible manner.

Methodologies for Valuation

It’s essential to remember that several techniques exist for estimating a company’s value, and the DCF is merely one of them. For those interested in diving deeper into the intricacies of discounted cash flow valuations, the Simply Wall St analysis model offers comprehensive insights.

Additionally, it is worth noting that we have identified 21 US stocks projected to deliver a dividend yield of over 6% in the coming year. Accessing this list could provide investors with alternative options for income generation.

Two-Stage Model Overview

To assess DEUTZ, we employ a two-stage growth model, which delineates different periods of cash flow growth. Typically, the initial phase sees higher growth rates, while the second phase accepts a more conservative growth outlook.

In our analysis, we look to estimate cash flows for DEUTZ over the next ten years. While we often refer to analyst estimates for guidance, when those are unavailable, we extrapolate previous Free Cash Flow (FCF) reports. Our assumption stipulates that companies with declining FCF will do so at a diminishing rate, whereas companies with growing flows will see a slow-down in their growth rate.

Understanding the Time Value of Money

The essence of the DCF model lies in the idea that a dollar in the future is less valuable than a dollar today. Therefore, we meticulously discount future cash flows back to their estimated present value.

Illustration of Projected Cash Flows

plaintext	Year	Levered FCF (€ Millions)	Growth Rate Estimate Source	Present Value (Discounted @ 6.6%)
2026	€110.3m	Analyst x2	€103m
2027	€115.7m	Analyst x3	€102m
2028	€119.9m	Est @ 3.57%	€99.0m
2029	€123.4m	Est @ 2.96%	€95.6m
2030	€126.6m	Est @ 2.54%	€92.0m
2031	€129.4m	Est @ 2.25%	€88.3m
2032	€132.0m	Est @ 2.04%	€84.5m
2033	€134.5m	Est @ 1.90%	€80.8m
2034	€137.0m	Est @ 1.80%	€77.2m
2035	€139.3m	Est @ 1.73%	€73.6m

Note: "Est" represents FCF growth rates estimated by Simply Wall St.

The Present Value of the 10-Year Cash Flow (PVCF) amounts to €896m.

Calculating Terminal Value: Moving Forward

Upon completion of the 10-year cash flow valuation, we then proceed to determine the Terminal Value (TV). This value accounts for all future cash flows beyond the initial ten-year projection period. The Gordon Growth formula provides a framework to calculate this value, using an assumed long-term annual growth rate based on the 5-year average of the 10-year government bond yield (1.6%).

Discounted Terminal Value Calculation

The calculated Terminal Value (TV) is derived as follows:

[
\text{Terminal Value (TV)} = \text{FCF}_{2035} \times \frac{(1 + g)}{(r – g)} = €139m \times \frac{(1 + 1.6\%)}{(6.6\% – 1.6\%)} = €2.8b
]

The Present Value of Terminal Value (PVTV) is calculated as:

[
\text{PVTV} = \frac{TV}{(1 + r)^{10}} = \frac{€2.8b}{(1 + 6.6\%)^{10}} = €1.5b
]

Total Equity Value

The Total Equity Value is then computed as the sum of the cash flows for the next decade combined with the discounted terminal value, culminating in a comprehensive valuation of €2.4b. When we divide this by the total number of outstanding shares, it suggests that DEUTZ shares may be undervalued relative to their intrinsic worth.

Key Considerations

While DEUTZ’s current share price of €11.1 reflects a 29% discount relative to our calculations, it is crucial to acknowledge that valuations can be imprecise tools. They require careful scrutiny and iterations—similar to how a telescope reveals distant galaxies.

Assumptions Influencing Valuation

The DCF model often relies heavily on two core assumptions: the discount rate and the projected cash flows. As a potential shareholder, it’s important to adopt your own evaluation of DEUTZ’s future performance based on rigorously analyzed data.

Investors must recognize that the DCF analysis does not factor in industry cyclicality or future capital requirements, thus it might not present an exhaustive view of the company’s future potential.

Further Analysis Required

To delve deeper into the analytical aspects of DEUTZ’s stock and its valuation, there are several critical factors you should consider:

1. Risks: DEUTZ presents one warning sign that you should scrutinize before making any investment decisions.

2. Future Earnings Potential: Comparing DEZ’s growth trajectory with its peers can shed light on its competitive position and market footing.

3. Alternative High-Quality Options: An assessment of other high-quality stocks can reveal opportunities that might suit your investment strategy better.

Utilizing AI legalese decoder for Clarity

In the complex world of financial valuations, navigating legal and financial jargon can be challenging. This is where tools like AI legalese decoder prove invaluable. By simplifying intricate legal terms, it could help you better understand investment agreements, financial disclosures, and any documentation associated with DEUTZ or other companies. Equipped with clearer insights, you can make more informed and rational investment decisions.

Conclusion

Valuation represents only one facet of investment analysis; it’s essential not to rely solely on the DCF model. This model is best used to evaluate assumptions and discern whether a company might be undervalued or overvalued. Regular updates on DEUTZ’s market position, coupled with a robust understanding of financial documents made easier through tools like AI legalese decoder, can bolster your investment thesis, arming you with the knowledge needed to navigate the investment landscape effectively.

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For additional insights or to calculate DCF valuations for other companies, make sure to explore the Simply Wall St app, which updates valuations for stocks regularly, enhancing your investment research capabilities. If you have any feedback regarding this article or wish to express concerns, please feel free to contact us directly.

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