Today we are going to show you how to value Boeing (or any other company) using discounted cash flow valuation (or DCF).
All it takes is 30 minutes and a financial model.
This will quickly give an indication of whether a stock is overvalued, undervalued or correctly priced.
The best part?
We are using management’s own expectations of the future.
And in today’s post, I’ll show the exact step-by-step model that I used.
You can get that model too. Simply click here to get it.
The 5-step process to easy DCF valuation using publicly available information
There are 5 steps to this DCF method:
Step 1: Find financial guidance from management
Step 2: Mix this with your own financial statement analysis (a lot easier than it sounds!)
Step 3: Build the discounted cash flow model (hint: You can skip this by downloading our model)
Step 4: Estimate discount rate (WACC)
Step 5: Sum all cash flows to get Enterprise Value
This method is highly effective and time saving, as management knows the company better than you and their guidance is a solid starting point.
Step #1: Find financial guidance from management
Your first step is to find guidance from management.
Go through the latest annual report or alternatively an investor presentation to locate it.
You can usually find it by searching for terms such as:
In our case, the information was located in Boeing’s investor presentation (source).
What we are specifically looking for is guidance regarding revenue, investments or any major changes in the company.
Here, Boeing is not presenting a lot of numbers but revenue is specifically stated.
Futher, Operating cash flow of $10bn gives us an EBITDA indication as operating cash flow is basically EBITDA +/- changes in net working capital.
As there are “no major news” in this, we believe it is safe to assume, that there will not be any major changes going forward.
In our model, we will simply assume revenue to be in the midpoint of the two figures at $94 billion for 2016.
This will be our first input into the model.
Step #2: Mix this with your own financial statement analysis (a lot easier than it sounds!)
Now that we’ve found management guidance we will mix this with our own financial statement analysis. We advocate using at least three years which is what we will do in this case.
Here’s exactly how we did it:
1. Plug historical financials into the model
Here we plug in revenue, EBIT, net working capital, capital expenditures and depreciation into the model (numbers in blue).
And just by plugging these into the model, we also get the historical EBITDA (EBIT + depreciation & amortization).
Having done this, the next step is to make some forecasts.
The beauty here, is that we have already established based on company guidance, that there are no major changes expected at Boeing going forward.
Thus, it is a good assumption that the historical levels are a good indication of future levels.
This is shown in the picture below.
- Revenue of $94 billion in 2016
- Hereafter, revenue grows by 5%, (historical level) and going to 2% as the long-term level
- EBITDA margin is “set backwards” so operating cash flow equals $10bn
- Net working capital as % of revenue is the average of the three prior years
- CapEx and depreciation are the same as in 2015
We have just build a forecast model.
Step #3: Build the discounted cash flow model (hint: You can skip this by downloading our model)
You can now build the discounted cash flow model.
The easiest way is to simply download our DCF model. Click here to download DCF Excel model.
Step #4: Estimate discount rate (WACC)
The fourth step is very simple.
You simply google “aswath damodaran betas by sector” or click this link.
Here, you go to the relevant sector and find the number for “unlevered beta corrected for cash”.
Boeing is most definitely in the aerospace and defense sector and the unlevered beta value corrected for cash is 1.2.
If you have already downloaded our model you type this and a couple of other values into our model and voila, we have our WACC of 7.49%.
Actually, we skipped a few things here. The other blue variables that needs input for the WACC are:
Equity ratio: Simply the difference between current market cap and enterprise value divided by enterprise value (source).
As can be seen, Boeing’s market cap and enterprise value are basically the same and thus the equity ratio is 100%.
Risk free rate: Simply 3 month LIBOR (source).
We use the current LIBOR rate which is 0.89 (per cent).
Cost of debt: Irrelevant as Boeing has no debt. Otherwise it would be the interest rate the company pays on its debt.
Size premium: You can apply a size premium for small companies (range of 0-5% depending on size). Most listed companies do not have a size premium and Boeing is no exception.
Tax rate: Simply the tax rate Boeing paid in the last financial year.
Step 5: Sum all cash flows to get Enterprise Value
The grand step where Excel does all the work and spits out a figure.
We get an Enterprise Value of $82b which is also the market cap as Boeing has no debt.
And that’s it.
This can be compared to the current market cap of Boeing as a first indicator of whether the stock is cheap, expensive or rightly priced.
If you want to convert this to a share price you simply divide the market cap by number of shares outstanding (source).
In other words:
$82,361,000,000 / 623,830,000 = $132
At the time of writing, Boeing is valued at $143 per share and thus, seems slightly overpriced.
Two quick points…
We would like to point out that this is a “quick and dirty” way to do a DCF.
However, we still feel this approach has a ton of value.
First, many people become so scared by the many terms in a DCF, that it takes a very long time to grasp the concept.
With this approach, you jump in, get your feet wet and actually see what happens in a DCF.
Secondarily, if the value you get is really high or low compared to the stock price, you know there is a basis for further evaluation and possible a purchasing or selling point in the market.
Now it’s your turn…
Go get our model and start making your own valuations.
What did your think of our way to do a quick DCF valuation?
Or maybe you have a question about a step in the process?
Either way, leave a quick comment below.
We’ll be around to reply and answer questions.
So if you have a question or a thought, leave a comment right now.