Today, we’ll walk through a straightforward valuation method to assess the investment attractiveness of Cleveland-Cliffs Inc. (NYSE: CLF). This method involves estimating the company’s future cash flows and then discounting them to their present value using the Discounted Cash Flow (DCF) model. This model is a common approach to valuation, providing insight into the potential value of an investment.
It’s important to note that various methods exist for valuing a company, and each has its own advantages and disadvantages depending on the circumstances. For a more in-depth explanation of the rationale behind discounted cash flow calculations, you can refer to the Simply Wall St analysis model.
Let’s explore the DCF model for Cleveland-Cliffs:
The Model: The 2-stage growth model is utilized in this scenario, considering two stages of the company’s growth. The initial stage may have a higher growth rate, while the second stage typically assumes a stable growth rate. Here’s the step-by-step process:
- Estimate Cash Flows: Obtain estimates for the next ten years of cash flows. Analyst estimates are used when available; otherwise, extrapolate from the last estimate or reported value. The assumption is that companies with declining free cash flow will slow their rate of shrinkage, and those with growing free cash flow will experience a slowing growth rate.
- Calculate Present Value: Sum the present value of future cash flows, resulting in an equity value of $19 billion in this case.
- Determine Equity Value per Share: Divide the equity value by the number of shares outstanding.
- Relative Valuation: Compare the calculated value per share with the current stock price to assess whether the company is undervalued or overvalued.
In this instance, with a current share price of $18.9, the company appears undervalued, representing a 50% discount to the current stock price. However, it’s crucial to recognize that valuations are not exact, resembling telescopes—slight adjustments can lead to entirely different outcomes. Always keep this in mind when interpreting valuation results.
