观热点：Calculating The Intrinsic Value Of Nutrien Ltd. (TSE:NTR)

Using the 2 Stage Free Cash Flow to Equity, Nutrien fair value estimate is CA$87.53

Current share price of CA$77.07 suggests Nutrien is potentially trading close to its fair value

Analyst price target for NTR is US$103, which is 18% above our fair value estimate

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Does the May share price for Nutrien Ltd. (TSE:NTR) reflect what it"s really worth? Today, we will estimate the stock"s intrinsic value by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. There"s really not all that much to it, even though it might appear quite complex.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

We"re using the 2-stage growth model, which simply means we take in account two stages of company"s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. 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 discount the value of these future cash flows to their estimated value in today"s dollars:

("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$17b

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. 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 1.8%. We discount the terminal cash flows to today"s value at a cost of equity of 8.6%.

Terminal Value (TV)= FCF₂₀₃₂× (1 g) ÷ (r – g) = US$2.2b× (1 1.8%) ÷ (8.6%– 1.8%) = US$34b

Present Value of Terminal Value (PVTV)= TV / (1 r)¹⁰= US$34b÷ ( 1 8.6%)¹⁰= US$15b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$32b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CA$77.1, the company appears about fair value at a 12% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don"t have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Nutrien 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 8.6%, which is based on a levered beta of 1.143. 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.

Strength

Earnings growth over the past year exceeded the industry.

Debt is well covered by earnings and cashflows.

Dividends are covered by earnings and cash flows.

Weakness

Earnings growth over the past year is below its 5-year average.

Dividend is low compared to the top 25% of dividend payers in the Chemicals market.

Opportunity

Good value based on P/E ratio and estimated fair value.

Significant insider buying over the past 3 months.

Threat

Annual earnings are forecast to decline for the next 3 years.

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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company"s cost of equity or the risk free rate can significantly impact the valuation. For Nutrien, we"ve put together three additional items you should further research:

Risks: For example, we"ve discovered 3 warning signs for Nutrien (1 doesn"t sit too well with us!) that you should be aware of before investing here.

Management:Have insiders been ramping up their shares to take advantage of the market"s sentiment for NTR"s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

Other Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every Canadian stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly.Alternatively, email editorial-team (at) simplywallst.com.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.

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