The December share price of Full Truck Alliance Co. Ltd. (NYSE: YMM) reflect its real value? Today we’re going to estimate the intrinsic value of the stock by projecting its future cash flows and then discounting them to today’s value. This will be done using the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they are fairly easy to follow.
There are many ways that businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. If you are interested in knowing more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
See our latest review for Full Truck Alliance
The calculation
We use the 2-step growth model, which simply means that we take into account two stages of business growth. During the initial period, the business can have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. First, we need to estimate the cash flow of the business over 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 discount the value of those future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) forecast
| 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
| Leverage FCF (CN ¥, Million) | CN ¥ 1.34b | CN ¥ 5.42b | CN ¥ 5.88b | CN ¥ 6.26b | CN ¥ 6.58b | CN ¥ 6.85b | CN ¥ 7.09b | CN ¥ 7.30b | CN ¥ 7.50b | CN ¥ 7.69b |
| Source of estimated growth rate | Analyst x1 | Analyst x1 | Est @ 8.37% | Is 6.45% | Is 5.1% | East @ 4.16% | Is 3.5% | Est @ 3.04% | East @ 2.71% | East @ 2.49% |
| Present value (CN ¥, million) discounted at 6.9% | CN ¥ 1.3k | CN ¥ 4.7k | CN ¥ 4.8k | CN ¥ 4.8k | CN ¥ 4.7k | CN ¥ 4.6k | CN ¥ 4.5k | CN ¥ 4.3k | CN ¥ 4.1k | CN ¥ 4.0k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = CN ¥ 42b
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 6.9%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = CN ¥ 7.7b × (1 + 2.0%) ÷ (6.9% – 2.0%) = CN ¥ 160b
Present value of terminal value (PVTV)= TV / (1 + r)ten= CN ¥ 160b ÷ (1 + 6.9%)ten= CN ¥ 82b
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is CN ¥ 124b. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current share price of US $ 10.0, the company appears to be quite undervalued with a 44% discount from the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
Important assumptions
We draw your attention to the fact that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around 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 Full Truck Alliance 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 6.9%, which is based on a leveraged beta of 0.987. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Next steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a business. It is not possible to achieve a rock-solid valuation with a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. Why is intrinsic value greater than the current share price? For Full Truck Alliance, we’ve compiled three relevant things you should consider:
- Risks: Concrete example, we have spotted 1 warning sign for Full Truck Alliance you must be aware.
- Future benefits: How does YMM’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 may not have considered!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for every NYSE share. If you want to find the calculation for other actions, just search here.
Do you have any feedback on this item? Are you worried about the content? Get in touch with us directly. You can also send an email to the editorial team (at) simplywallst.com.
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 any stock 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.