In creating the Leaderboard, DCF Tool's primary goal was to leverage our ability to analyze far more stocks than any human could analyze manually to discover quality undervalued opportunities. Our approach as followed this intent with several filters that limit poor performing companies from the results and fixed input parameters for consistent comparison. Leaderboard Criteria The leaderboard filters all tickers according to the following rules: Share price must be greater than $10 Market cap must be greater than $500 million Must have positive unlevered free cash flow for 4 out of the past 5 years Our rule set was made to filter penny stocks, microcap stocks, and most importantly companies that have yet to produce positive, proven, stable cash flows to investors. These simple rules eliminate many poor performers. Input Parameters When evaluating the DCF model for each ticker for the leaderboard, the following parameters are used: Maximum growth rate: 20% Discount rate: 9% Terminal rate: 2% The input parameters used here approach the growth and terminal phases of the company conservatively. By capping growth rate, we have cut the sensitivity of any overly optimistic stock forecasts. Finally, we use a fixed discount rate of 9%, consistent for all tickers and limiting the sensitivity of terminal value. Purpose of Leaderboard The leaderboard was created as one way to discover potentially undervalued opportunities. As with any automated leaderboard, the specific reasons a company finds its way on this list are numerous and relevant research should be done to review in depth why DCF models suggest it to be undervalued. All of the information provided is for research purposes only and should not be construed as specific investment advice, along with all other information found on this site…

Sep 30, 2021

Central Garden & Pet company- you may have never heard of it before just now. As the name suggests, their portfolio offers a wide variety of garden and pet products, with both segments surprisingly contributing nearly equal to their topline revenue. Their balance sheet suggests a stabilized, mature company and recent sell offs of small cap stocks has placed this company as a prime undervalued opportunity based on DCF modeling. Before we break down the results, a quick background of DCF Tool can be found here. Input Parameters Our default analysis predicts a reasonable 3.6% growth rate, which l do believe is accurate considering their historical performance. Central has mature market segments with fairly saturated market presence, which suggests that they won’t see necessarily astounding growth. That said, a 3-4% growth rate that only slightly outpaces historical inflation provides a safe, realistic input value for their future. As of this article, the WACC (discount rate) is calculated to be 7.3%. This is somewhat on the low side if you consider the typical discount rate to be somewhere around 8-11%. I will therefore edit this to a more modest 9% (remember, a higher discount rate results in a more conservative analysis). For this model I have adjusted the Terminal Rate to 0%, as using the default 2% is substantially close to the normal growth rate and therefore significant to the assumptions of the model. More Parameters The default future flow projects approximately $131 million for 2021, which may be high if you exclude their 2018 record breaking year. Averaging their cash flows from 2015, 2016, 2017, 2019, and 2020 results in a more reasonable $101.3 million. For that reason, I will use this as the future year flow to build from. All other parameters were left at their default if not noted. Results Based on these inputs, Central (CENT) is undervalued by 57% from its current stock price of approximately $45. Safety Check As a gut check using DCF Tool, I will remove the growth rate entirely and project the 2020 cash flow forever ($70 million). This essentially represents what the company is worth if it performed like it did in 2020 forever, which in Central’s case was coincidentally one of its worst years due to COVID (only making this safety that much more conservative). For Central, that still results in a massive 31% discount. Simply put, with 0% growth and using Central’s worst performance in nearly 7 years, it is still trading at 31% below its current intrinsic value. Interestingly, this $65 is about where the stock peaked before the recent sell-off. Considering all of the above analysis, Central presents strong evidence for it being an undervalued opportunity to explore. Disclosure: DCF Tool (I/we) have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from advertising/affiliate links). DCF Tool has no business relationship with any company whose stock is mentioned in this article…

Aug 18, 2021

Finding investment opportunities can feel daunting, especially for newer investors. How do you find new companies? How do you evaluate them? How do you have confidence in your decision? Quick internet searches bring back hundreds of approaches, but one of the most common is valuation techniques. Valuation techniques have become increasingly popular due to some famous investors using them to great success: Peter Lynch, Warren Buffet, Benjamin Graham to name a few. The approaches vary but are all common with one fundamental starting point: company financials. The underlying "assumption" is that a company has a true, intrinsic value. This value can be derived from how the company is performing, or how much money the company generates from its operations. I say “assumption” as this isn’t so much an assumption as it is common sense- every company has a value, and this value is based on its performance. Valuation methods can take on a variety of forms, using different aspects of company financials to derive a true value. This is where Discounted Cash Flow (DCF) models come in. A DCF model is one valuation method that relies on finding the cash flows a company generates and argues that this cash flow is the ultimate value proposition to the investor. At DCF Tool, we have taken an introductory approach into the DCF modeling field- attempting to make the valuation approach more palatable and accessible to a beginner. We want to be the ultimate beginner source for investors just starting out. DCF Tool is a fully automatic DCF calculator that makes predictions based on the historical performances of each company listed on the major American stock markets. DCF models can become quite complex, with entire academic books and research on best practices. You can use DCF Tool as a launching pad into discovering the full depth of the field, if you choose. Circling back to the original questions posed at the beginning, DCF models can provide the framework for answering them. How do you find new companies? DCF Tool has a leaderboard that automatically filters and finds investment ideas using the DCF model principles. How do you evaluate? DCF models are one approach in the valuation field. How do you have confidence? Valuation methods provide an explicit true value result. On top of that, they also have inherent adjustments you can make to find what safety factor, or confidence level, you can assume for a particular investment. DCF Tool is the premiere site for beginning this journey into value investing. Use our calculator to see how different companies perform, and how changing different parameters can have significant impacts on the end results. Through this discovery, many amazing investment opportunities can be found, with comfortable safety margins to justify confidence in your position…

Jul 28, 2021

AT&T (T), known for its consistent dividend and reliable business model has found itself on the undervalued list during recent analysis using our calculator. Before we break down the results, a quick background of DCF Tool can be found here. Input Parameters While our default analysis predicts a 15% growth rate, when you consider AT&T as a whole, I don't think using historical performance is useful. The telecommunications industry isn’t one that I would expect huge growth, especially not at a 15% rate. Looking at the most recent 3 years, AT&T hasn’t seen much of any growth- thus using 15% doesn’t make much sense. As AT&T is a fully developed company in an industry with seasoned competitors, a more conservative growth rate should be used. Reviewing estimates from multiple sources, I believe using a 4-6% growth rate is a more conservative and realistic rate, which is what will be used for this analysis. We will also look at one significant competitor and how it compares later on, for further justification of this undervalued alert. As of this article, the WACC (discount rate) is calculated to be 4.7%. This is somewhat on the low side if you consider the typical discount rate to be somewhere around 8-11%. I will therefore edit this to a more modest 9% (remember, a higher discount rate results in a more conservative analysis). For this model I have adjusted the Terminal Rate to 0%, as using the default 2% is substantially close to the normal growth rate and therefore significant to the assumptions of the model. More Parameters For an added margin of safety, I have fixed the first future year flow from the 4-6% of the previous years’ to a fixed $35 billion. 2 out of the last 3 years have seen $35 billion in free cash flows, thus using this as our starting point gives even more safety into our modeling. Results Based on these inputs, AT&T is undervalued by 53-56% from its current stock price of approximately $27.5. For a fully developed company with consistent financials, this is unique and indicates the market may not be properly pricing the company. Safety Check As a gut check with DCF Tool, I have removed the growth rate entirely to 0% and kept the 0% terminal rate. This helps to protect if any of your assumptions, in this case the growth rate, are significantly off. Using these safety checks, AT&T still provides an astounding 47% undervalue proposition. Simply put, even if AT&T never grew by another penny, it is still trading at 47% below its current intrinsic value. Competitor Analysis As a final gut check, we can use AT&T’s largest competitor to see how they compare. Do they outperform, or is the industry as a whole giving undervalued signals? Verizon (VZ) stands out as the main competitor to compare. Using the default values in DCF Tool (which provide an optimistic outlook for Verizon, the results show VZ is currently trading at exactly what it is worth. This result is incredibly insightful, as it gives us the knowledge that the industry is not necessarily all discounted- AT&T may be uniquely situated based on its current market price. Considering this comparison, along with the listed safety checks, AT&T presents a strong case for it being an undervalued opportunity to consider. Disclosure: DCF Tool (I/we) have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from advertising/affiliate links). DCF Tool has no business relationship with any company whose stock is mentioned in this article…

Jul 20, 2021

Discounted Cash Flow (DCF) models can be a fantastic resource for investors trying to calculate the intrinsic value of a company. They have clear input parameters and by unlevering these cash flows, DCF models fairly compare any two companies- something that other metrics can miss when comparing different industries. That said, DCF models are not always a perfect fit. Some companies operate in such a way that the DCF results do not accurately reflect the true value of the company. Amazon (AMZN) - Biggest Example of DCF Failing Amazon, one of the top 5 largest companies in the world, provides possibly the best example of a common pitfall with DCF models. As of this writing, Amazon is valued at roughly $1.6 trillion, yet DCF Tool gives the following results: 7 out of the past 9 years have negative cash flows, yet the company has reported massive growth in earnings year over year for nearly a decade of around 25-35%. Revenues have grown to almost $500 billion in 2021, yet DCF Tool models the stock as having a negative value. Analyzing Why AMZN Gives Poor Results Something very important to know about Amazon is their company approach, which looks different from many other companies. In simple terms, Amazon invests heavily in the company to drive growth, which increases revenues, which they then reinvest back into more investment in the company to drive more growth. Every company uses this model to some extent to drive growth. Amazon however does this at a much higher level, with investments increasing with their revenue growth. Their historical financial statements indicate that year after year they spend significant amounts of money on reinvesting in growing. These investments can be seen under the “Capital Expenditures” line of a company’s financial statement, representing cash spent towards the company. These expenses cover a variety of items, but can be generally seen as investing in the business model or it’s growth. To put in perspective just how much more Amazon spends on this than other companies, below is a graph of the ratio of capital expenditures to earnings before interest and taxes (EBIT). This ratio normalizes a company’s CapEx spending relative to how much money they earn. All of these companies are trillion dollar companies with established earnings, with 3 of the 4 being in the technology sector. While Apple, Walmart and Google are all within the same range year to year, Amazon blows the other three away in capital expenditures. The other significant result is how Amazon’s ratio exceeds 100%, as indicated by the red line. It’s not just that Amazon spends more that affects DCF results, the fact this is more than EBIT significantly skews results. Why Capital Expenditures Matter The basic equation for Unlevered Free Cash Flows (UFCF) is: $$UFCF = EBIT * (1 - Tax Rate) + D\&A + \Delta NWC - CAPEX$$ EBIT is the main driver for creating positive cash flows for a company and capital expenditures are taken away. Conceptually this makes sense, “free cash flow” related to how much a company earns minus anything it spends on business operations. The key for Amazon is that because CapEx exceeds EBIT (in 2017 it was nearly 300% of EBIT) the UFCF result is almost always negative. For every dollar they earn, they spend more on reinvesting in the company. This creates a negative cash flow condition. As DCF models rely exclusively on this result, Amazon results in an entirely skewed result that is not applicable. Traditional DCF models provide insightful results to valuing a company, however there will always exist extreme examples where DCF models breakdown. Amazon provides the largest and best example. In these situations, look to other metrics for evaluating the investment proposition in lieu of DCF models…

Jul 12, 2021

Welcome back! After breaking down the historical financials, calculating EBIT, and finding the unlevered free cash flows from Part 1, we can finish the DCF model to find the intrinsic value of our example (WMT). If you haven’t read Part 1, check it out here. Calculating WACC Weighted Average Cost of Capital (WACC) is commonly used as the Discount Rate. The Discount Rate is the required return (%) you would need to justify the investment, and the rate at which we will discount the future cash flows of the company. Another common rate used is the average stock market return of 9%, which can be used in lieu of the WACC. To find a company specific WACC, the following are all required for the current date only: Market Cap Total Debt Current 10yr Treasury Rate Company Beta Finding this information again on any financial news site, WMT gives the following: Market Cap: 378.559 Total Debt: 48.871 Current 10yr Treasury Rate: 0.0154 Company Beta: 0.47 Note that these numbers vary somewhat daily, so depending on how they change what you see may be slightly different. DCF Tool updates these values daily. WACC = [Market Cap / (Market Cap + Total Debt) ] x [ Treasury Rate + Beta x (9% - Treasury Rate] + [ Total Debt / (Market Cap + Total Debt) ] x [ (Interest Income / Total Debt) x (1 – Tax Rate) ] Simplifying this to what each expression relates to: WACC = Equity Rate + Debt Rate Plugging in all of the values, including those found during the UFCF calculation such as Tax Rate, the outputs give you: Tax Rate: 0.333495 Equity Rate: 0.0446923 Debt Rate: 0.003421 WACC: 0.048113 DCF Tool currently gives 4.8% which matches our hand calculations. Growth Rate DCF Tool uses exponential fit to find the historical growth rate for each ticker. When using our site, you can input your expected growth rate as you desire. When using DCF Tool, you can input your expected growth rate as you desire. DCF Tool WMT Growth Rate: 5%. Growth Phase DCF Tool uses a 2 phase DCF model projection, with the first phase being the growth phase. By default, this is set to a 5 year projection outlook. To calculate the growth phase, the equation is as follows: 2022 (the next year) UFCF Flow = 2021 UFCF x (1 + Growth Rate) / [ (1 + Discount Rate or WACC) ^ n ] Where n is the number of years in the future you are projecting. For 2022, UFCF = 18.4 x 1.05 / (1.048)^1 = 18.42 Plugging these in, both our hand calculations and DCF Tool give the following results: | | Future Flow | Discounted Flow | |------|-------------|-----------------| | 2022 | 19.3 | 18.42 | | 2023 | 20.27 | 18.45 | | 2024 | 21.28 | 18.49 | | 2025 | 22.34 | 18.52 | | 2026 | 23.46 | 18.56 | To find the total value of the Growth Phase, we add all of the discounted flows together. Combined, WMT’s Growth Phase represents a total present value of 93 Billion. Terminal Phase The second phase involves estimating the value at the end of the company’s life or model period. There are several methods to finding this value, however DCF Tool by default uses a perpetual growth method. Terminal Value The calculation to find the terminal value is: Terminal Value = UFCF (last year of growth phase) x (1 + Terminal Rate) / (Discount Rate or WACC – Terminal Rate) Terminal Rate by default is set to 2% and more can be found here on the importance of terminal value. For WMT this looks like: Terminal Value = 23.56 x 1.02 / (.048 - .02) = 858 Billion However, DCF Tool automatically cuts this result off if it exceeds 30 times the final year cash flow, in this case of 23.56. As a result, we show the Terminal Value at just 704 Billion. Discounting Terminal Value The 704 Billion terminal value we just found is the future value of the company. In order to get the present value, we must discount this back to the present: Terminal Value (Present) = Terminal Value (Future) / (1 + Discount Rate)^ (n +1) Where again, n is the number of years in the growth phase. For our example this works out to: Terminal Value (Present) = 704 / (1.048^(6)) = 531 Billion Finding Intrinsic Value Finally, after performing all of these calculations, one more step is required to finish the DCF model and get a single intrinsic value number. You’ll want to look one last time at the financial news site for data on the total number of outstanding shares the company has issued. The equation is simply: Intrinsic Value = (Growth Phase Value + Terminal Value) / (Total number of outstanding shares) For Walmart (WMT) we get: Intrinsic Value = (93 + 531) / 2.81 = 221.59 WMT Intrinsic Value = $221.59 Implications of Results Simply put, the “Intrinsic Value” we have just found is what our DCF model says the company is truly worth, based solely on the financial performance of the company. This is important, it does not take into account the current stock price, chart movements, etc. It is purely based on the company and tries to apply a value to that performance. If the Intrinsic Value found is less than the current stock price, we refer to this as the company being “undervalued”. This represents potentially a good value opportunity as one could expect the stock price to approach the intrinsic value. If the Intrinsic Value found is more than the current stock price, we refer to this as the company being “overvalued”. This represents potentially a bad value opportunity as one could expect the stock price to approach the intrinsic value. Summary If you have made it this far, it’s probably evident to you that DCF models are extensive, time consuming calculations. Depending on how many years of data you want to analyze, it quickly becomes a task involving hundreds of values. Those values however provide massive insight into whether a particular company is trading above or below it’s true intrinsic value. DCF Tool was specifically created for beginners to understand DCF modeling and to simplify this process drastically. At its core, 3 major inputs fundamentally drive all DCF models. DCF Tool puts these at the forefront of your focus, while in the background it handles the heavy lifting task of performing hundreds of calculations in milliseconds. The next time you approach reviewing a company, you can use DCF Tool to automate the modeling process to assist your research needs…

Jun 18, 2021

Discounted Cash Flow (DCF) models can become cumbersome to create, between collecting dozens of variables over multiple years and extensive calculations, manually building a DCF is less than enjoyable. While the purpose of DCF Tool is to handle all of these calculations automatically, this guide provides a full walkthrough example of how this site actually works. We strive for full transparency in how we handle calculations and also to effectively introduce everyone to this investing approach. For an overall look at DCF models, read here. In today's climate, many beginners are diving deep into investing with no real background on how to value a stock. DCF Tool serves as the premier introduction to one way of finding stock value: DCF models. With that said, let's get to it! Example Stock: WMT We've chosen Walmart (WMT) for this example for several reasons: nearly every investor should be familiar with the company, they are well established and have seen relatively consistent financial performance. While consistency is not required, it does help DCF calculations be more accurate. The less consistent a company is, the harder it can be to predict how they will perform in the future, which makes the model more sensitive to any user input bias or error. Historical Financial Statements Every DCF calculation begins with pulling historical financial statements and gathering the necessary data. DCF Tool pulls up to the past 10 years of data if available. The following are all required to perform the calculations, for each year: Capital Expenditures Current Assets Current Cas Current Liabilities Current Debt Taxes Paid Pre-tax Income Interest Income/Expense Depreciation Total Revenue Cost of Revenue Operating Expenses You can find this information in the company annual financial reports, or more easily using your favorite stock market news website (Yahoo Finance, Morning Star, etc.) You will want to look under the financials section at the annual reports: Income Statement, Balance Sheet and Cash Flow. For clarity, we'll walk through this calculation for the past 4 years. Combining all of this data into one table, you should have something that looks like this: | | 2017 | 2018 | 2019 | 2020 | |----------------------|---------|---------|---------|---------| | Capital Expenditures | 10.051 | 10.344 | 10.705 | 10.264 | | Current Assets | 59.664 | 61.897 | 61.806 | 90.067 | | Current Cash | 6.756 | 7.722 | 9.465 | 17.741 | | Current Liabilities | 78.521 | 77.477 | 77.79 | 92.645 | | Current Debt | 9.662 | 7.83 | 6.448 | 3.83 | | Taxes | 4.6 | 4.281 | 4.915 | 6.858 | | Pre-tax Income | 15.123 | 11.46 | 20.116 | 20.564 | | Interest Income | 2.178 | 2.129 | 2.41 | 2.194 | | Depreciation | 10.529 | 10.678 | 10.987 | 11.152 | | Total Revenue | 500.343 | 514.405 | 523.964 | 559.151 | | Cost of Revenue | 373.396 | 385.301 | 394.605 | 420.315 | | Operating Expenses | 105.51 | 107.147 | 108.791 | 116.288 | Earnings Before Interest (EBIT) EBIT represents all of the money a company has earned in the given year, before taking out interest expenses. EBIT = Total Revenue - (Cost of Revenue + Operating Expenses) For 2017, this would look like: EBIT = 500.343 - (373.396 + 105.51) = $21.437 Billion Repeat this for each year. Note: EBIT is also commonly listed on financial news sites and can be used in lieu of calculating it here. This is shown for a supplemental understanding on how to find EBIT. Tax rate Like your personal finances, companies pay taxes as well. DCF Tool finds the tax rate using the equation: Tax rate = Taxes / Pretax Income For 2017: Tax Rate= 4.6 / 15.123 = 30.41% Repeat this for each year. Changes in Net Working Capital The annual change in net working capital (money) a company has to use for its business. For our purposes, this calculation excludes current cash and debt (note the subtraction of these in the equation below). NWC = (Current Assets - Current Cash) - (Current Liabilities - Current Debt) Change in NWC (for 2018) = NWC (of 2018) - NWC (of 2017) For 2017, NWC would be: NWC = (59.664 - 6.756) - (78.521 - 9.662)= -$15.951 Billion The 2018 change in NWC would be: Change in NWC (2018) = -15.472 - (-15.951) = $0.479 Billion Repeat this for each year. Unlevered Free Cash Flows Finally, the key number we need: cash flows. Unlevered Free Cash Flows (UFCF) combines all of the values we have found so far into one equation: UFCF = EBIT x (1- Tax Rate) + Depreciation - Capital Expenditures + Change in Net Working Capital For 2018: UFCF = 21.957 x (1 - 0.3735) + 10.678 - 10.344 + 0.479 = $14.57 Billion Repeat this for each year. Verifying DCF Tool Results So Far At this point, your results should look like this: | | 2017 | 2018 | 2019 | 2020 | |---------------------------|-------------|-------------|-------------|-------------| | Tax Tate | 0.30417 | 0.37356 | 0.24433 | 0.33349 | | EBIT | 21.437 | 21.957 | 20.568 | 22.548 | | Working Capital | -15.951 | -15.472 | -19.001 | -16.489 | | Change in Working Capital | | 0.479 | -3.529 | 2.512 | | UFCF | | 14.5677 | 12.2955 | 18.4283 | Using these numbers, we can verify that the results DCF Tool gives match. Note that due to Walmart's financial reports being submitted for the following year, our "2018" result will show in 2019, which does not affect the final results. DCF Tool Results: | | 2019 | 2020 | 2021 | |------|--------|------|------| | UFCF | 14.6 | 12.3 | 18.4 | As you can see, these match exactly to the hand calculations we have performed so far. Now that we have unlevered free cash flows for each year, we can start building up the model. Check out Part 2 of this article here for a continuation and the final results…

Jun 16, 2021

Netflix (NFLX), a company known for its high growth has surprisingly found itself on the undervalued list during recent analysis using our calculator. Before we break down the results, a quick background of DCF Tool can be found here. Input Parameters While our default analysis predicts an astounding 31.8% growth rate, when you consider Netflix as a whole, I don't think using historical performance is useful. Netflix has seen tremendous growth in the past 5 years, exceeding even their own expectations. However, moving forward gaining new members and continuing this growth will present an even greater challenge to the company. With additional competition and an already large market presence, there are not as many avenues for them to continue this high growth. Reviewing estimates from multiple sources, I believe a 14% growth rate is a more conservative and realistic rate, which is what will be used for this analysis. As of this article, the WACC (discount rate) is calculated to be 8.5%. This is a relatively safe discount rate when considering other investment opportunities that could be expected to return 8-11%. We will therefore leave this value at the default result. For this model we will also leave the Terminal Rate at the standard 2%. More Parameters For an added margin of safety, I have chosen to adjust the growth period from the default of 5 years down to just 3. While Netflix has proven for many years to be the industry leader, I do feel that market factors will restrict them from seeing their historic growth rates. As such, predicting 14% for just the next 3 years protects us from being overly optimistic about their future prospects. Results Based on these inputs, Netflix is undervalued by 29% from its current stock price of approximately $490. This is very interesting considering it is both a high growth company and the market is near all-time highs- which creates very few undervalued opportunities. Safety Check Something I use as a gut check with DCF Tool is removing the growth rate entirely and assuming it will only expand by 2% per year. This helps to protect if any of your assumptions, in this case the growth rate, are significantly off. For Netflix, that still results in a 14% discount. Simply put, even if Netflix grew by just 2%, or roughly the average rate of inflation, it is still trading at 14% below its current intrinsic value. Considering this safety check along with the expected growth rate case, Netflix presents a strong case for it being an undervalued opportunity to consider. Disclosure: DCF Tool (I/we) have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from advertising/affiliate links). DCF Tool has no business relationship with any company whose stock is mentioned in this article…

May 27, 2021

If you're new to the site and have started looking through companies, you may be wondering why so many look similar to this: Results like this may give the impression that the site is broken or DCF models are highly inaccurate. Let's provide some background to why so many companies currently give these results. Two major factors: Current stock market conditions Type of company (ex. growth) Overall Stock Market Conditions The market is at or near it's all time highs for the entire history of the stock market. This makes it incredibly difficult to find undervalued companies: on average, everything is priced high. As an example, historical P/E (Price to Earnings) Ratio of the entire market looks like this: Source: https://www.multpl.com/shiller-pe P/E ratio is the price of a company versus the earnings it creates. It can be thought of as the price someone is currently willing to pay for the earnings a company provides. As you can see, this ratio is higher than nearly any moment in history. Simply put, investors are paying historically high for these earnings, which drives stock prices up and eliminates many "undervalued" opportunities. Understanding market conditions, undervalued companies will come from two main scenarios. The whole market can sell-off, driving prices lower and eventually below their intrinsic value. Or earnings can beat expectations driving cash flows higher, increasing intrinsic value above the stock price. Both of which create "undervalued" opportunities. With these conditions, investors must search harder to find undervalued companies currently. Growth Stocks There is a growing popularity for growth stocks, with much hype and anticipation surrounding them. It's not uncommon to see high growth stocks with expected increases of 80% or more year over year, that may not be profitable right now. These companies certainly have value based on these expectations to a growth investor, but not necessarily as much as from a value perspective. Discounted Cash Flow (DCF) models are inherently value focused, best applied to proven companies with established revenue streams and are profitable. Looking at cash flows in a growth company that may have no revenue isn't very useful: unless the company has positive flows, a DCF model will come up with $0 value. With DCF Tool, you can account for this by adjusting the growth rate and next year's cash flow accordingly. Because growth companies rapidly evolve, using the growth rate DCF Tool calculates and historical cash flows don't give a full picture of future performance. Instead of using historical performance, you can adjust based on company forecasts to account for their high growth expectations. Keep in mind that as these inputs are adjusted, the model becomes much more dependent and therefore sensitive to these assumptions- slight differences can vastly affect the accuracy. Using DCF Tool DCF Tool provides investors with the quickest and easiest tool at creating a DCF model. No matter the market, DCF Tool can assist in quickly analyzing a company's intrinsic value to find undervalued gems…

May 04, 2021

Possibly the most time consuming part of creating a Discounted Cash Flow model is spent calculating unlevered free cash flows. Finding these cash flows requires handling over a dozen data points across several years, which can take hours to complete- unless you use DCF Tool which completes this in seconds. While a lot of time is put into finding the cash flows, terminal value is one quick assumption that can be made in seconds. This also may be the most overlooked part of a DCF calculation- for many companies, terminal value represents over half of the total intrinsic value (final result). Without more consideration for this one input, results can be drastically skewed. DCF Tool uses a perpetual growth model to estimate the terminal value. In the perpetual growth model, we assume the company will grow at some conservative low rate forever. The Terminal Value Formula First, let's review the equation: $$Terminal Value = \frac{Final Year UFCF * (1 + Terminal Rate)}{Discount Rate - Terminal Rate}$$ In this equation, the difference between the Discount Rate (often the WACC) and the Terminal Rate drives the terminal value. As an example, let's take a company with a low WACC, such as Ford (F). As of this writing, Ford has a Weighted Average Cost of Capital (WACC) of just 3.3%. If we assumed a final UFCF of $5 billion for this example, and a 2% terminal rate (based on historical yield rates), the equation would give: $$TV = \frac{$5B * 1.02}{0.033 - 0.02} = $392B$$ At $392 billion, this would be an exit multiple of 78 times the final $5 billion cash flow! In simpler terms this result is the price someone would theoretically pay to buy the company, 78 times the amount it makes in just one year. On its own this result is incredibly unrealistic, Ford would almost certainly not be able to find a buyer at such a high multiple. Going further, if the model projected 5 years of growth rate at an average UFCF of $5 billion per year, the growth phase would total $25 billion* in value. Adding this to the $392 billion terminal value, the terminal value in this example represents 94% of the total intrinsic value! This example clearly shows how significant terminal value can be in DCF modeling. With such a skewed result, all of the hard work done to find the unlevered cash flows is almost entirely wasted by this one equation. Sensitivity To show just how sensitive and therefore important the Discount Rate and Terminal Rate are, let's change the WACC to a discount rate of 2.5%: $$TV = \frac{$5B * 1.02}{0.025 - 0.02} = $1,020B$$ Simply changing the discount rate from 3.3% to 2.5% nearly triples the final terminal value. As the discount rate continues to approach the terminal rate, this gets more and more excessive. Doing a DCF model is worthless if you don't consider these variables- simply focusing on growth rates isn't enough to accurately model the value of a company. Always consider the difference between the Discount Rate and Terminal Rate when doing an analysis. DCF Tool is here to help Historical data suggests that across all industries, an exit multiple above 30 is extremely uncommon, with the average being between 5-15x. That's why our model automatically clips any results above 30x (or a corresponding difference between Discount Rate and Terminal Rate of 3.3%). This safety is yet another reason to use and trust DCF Tool as your first source for scanning potential investment opportunities. *For the purposes of this example and to maintain clarity, these values are not discounted to a present value…

Apr 24, 2021

While we do our best to support as many tickers as possible, you may have stumbled on some that aren't supported. Below is a list of the possible error messages. ETF's or Holding Companies Many tickers are for Exchange Traded Funds (ETFs) or holding companies. This means the ticker doesn't represent a specific company, but is a portfolio that contains many companies (sometimes thousands). Therefore, a DCF model cannot be performed because the ticker itself does not have financial data to analyze. For these tickers, review the fund prospectus to get an idea of what companies make up the fund. Then, you can perform a DCF calculation on those specific stocks. Ticker Not In Database We use a third party financial database that is consistently updating with the latest information. However some stocks are not currently supported, generally smaller companies that are not included on the major indices. As they update their database with more supported stocks, our site automatically pulls this information. To help with this, a new feature currently in development will allow you to fully input the relevant financial information- giving you the control to flexibly perform DCF calculations to any company. Financial Structure Currently DCF Tool provides financial analysis to a majority of companies. One sector that is not supported is the banking industry. Due to differences in accounting methods and how banks create profits through lending, traditional Discount Cash Flow models are not applicable. We have therefore proactively removed support for these companies to ensure results are accurate and reliable for tickers that are supported…

Apr 14, 2021

Welcome to the first automatic DCF model calculator! With DCF Tool, we hope that you'll be able to quickly and accurately analyze company valuations using our online calculator. Below, we'll walk through a variety of features on our site. Initial Page Ticker In the Ticker field, insert any stock listed on the major American stock exchanges. Note: Not all Tickers are currently supported, depending on a variety of factors including: length of company formation/available financial reports, company business structures. Analysis Parameters Discount Rate DCF Tool defaults to using the company specific WACC, however you can override it with any other discount rate (ex. S&P 500 historic performance). Growth Rate DCF Tool will try calculating a linear regression weighted fit to past years UFCF performance. This can be overridden, and in some cases must be inputted if past years data are volatile, and thus a linear regression fit would be inaccurate. Terminal Rate Default to 2%, this should be adjusted based on the expected growth rate in perpetuity of the specific company. More Parameters Here, you'll find options to adjust the number of growth years as part of the 2-phase model and to manually input the first future year cash flow value. This is highly useful in cases where companies have shown erratic, or negative previous year cash flows- you can manually input your assumption that the model can then forecast in this scenarios. Calculated Cash Flows In the below example, previous years cash flows are calculated and overlaid with the linear weighted regression fit- showing the calculated growth rate. As you can see, this growth rate has been used as the default for future years. This can be overridden under the "growth rate" parameter. Analysis Results DCF Tool combines all of the math, input variables, and outcomes into a simple results section that summarizes your results. Share your results with others using the links within this section! …

Mar 30, 2021

Discounted Cash Flow (DCF), is a financial model designed to forecast a company's free cash flows to determine the current intrinsic value per share of the company. Future cash flows are discounted to present value and combined with the terminal value of the company to find the net present value. DCF models can be highly valuable at estimating the value of a company when done properly, however all models rely on assumptions about the future performance of a company. Long term value investors like Warren Buffett and Benjamin Graham specialized in analyzing a company's performance to identify those that were undervalued based on these principles. The key principle of a DCF model is that the value of the company (intrinsic value) can be found and that the company stock price should correlate directly to this value. DCF models can identify when there are discrepancies in these values, identifying to investors potential opportunities where a company is either over or undervalued based on DCF models. DCF modeling is best applied to consistent, proven businesses that have steady revenues - preferably cash positive. Startup companies, high growth companies, and other similar businesses are highly volatile and more dependent on the input variables (future performance), which are inherently much harder to predict in these types of companies. In these cases, DCF models are less reliable and should be used sparingly. Why Discounted? Simply put, the value of a future dollar isn't worth as much as a dollar today. A variety of factors influence this result including inflation and opportunity costs. Depending on the level of inflation, each year that passes inflation slowly eats away the value of the initial dollar. Opportunity costs are another major reason why a future dollar is less valuable than today. Each dollar today could be invested in a variety of different places, each with their own levels of risk and expected returns. Combined, future cash flows must be discounted back to todays present value to accurately weight its value. Discounted rate There are two discounted rates most commonly used for a DCF model: Weighted Average Cost of Capital (WACC) Expected average return of the stock market (commonly ranging from 7-12%) More about WACC can be found here: Investopedia. DCF Tool automatically calculates the WACC for each company analyzed, and uses this as the default discount rate. Two key assumptions in a DCF Revenue growth (Growth Rate) - inherently assumes operating margins and other company performance remain constant Terminal growth (Terminal Rate) - The company will grow forever at a specific rate, which is not guaranteed to be true What is unlevered free cash flow? Unlevered Free Cash Flow (UFCF) is the cash that's available to investors, or the value return you would see for being a partial owner of the company. Cash flows are the net flow of money made by the business available to both investors and the company for reinvestment (capital expenditures) for further growth. Using unlevered free cash flows allows investors to to accurately compare any two businesses, adjusting balance sheets to any accounting differences between companies. UFCF also helps to accurately determine profitability of a company, rather than solely using metrics such as earnings or net income which can be misleading to investors. DCF Tool automatically pulls company financials to calculate the unlevered free cash flows, as outlined below. Calculations EBIT: Earnings before interest and taxes. Tax Rate: The tax rate paid by the company that year. D&A: Depreciation and Amortization. ΔNWC: Annual changes in Net Working Capital, excluding Cash and Debt. CAPEX: Cash investments in company activities. $$UFCF = EBIT * (1 - Tax Rate) + D\&A + \Delta NWC - CAPEX$$ $$TV = \frac{UFCF_n * (1 + r_{terminal})}{(r_{discount} - r_{terminal})}$$ $$NPV = \sum_{i=1}^n \frac{UFCF_i}{(1 + r_{discount})^i} + \frac{TV}{(1 + r_{discount})^{n + 1}}$$ 2-Phase Model DCF Tool is an inherent 2 phase model, separated by the Growth phase and the Terminal phase. In the Growth phase, companies are expected to grow at the defined growth rate as the business expands.This phase can be adjusted through the advanced parameters to any length of time, however this defaults to 5 years. It is not recommended to use both a high growth rate and an excessive number of years within the growth stage, as predicting each future year becomes less and less reliable. After growth comes the Terminal phase, which is essentially the expected long-term growth rate the company will see forever. Because the terminal value of a company can carry significant weight to the intrinsic value, this rate can greatly impact DCF accuracy. It should not be assumed that this is always positive, as companies in terminal stages could grow at a low positive rate, they could remain stagnant, or they could shrink in size - a negative growth rate. Carefully consider the long term viability of the business, and adjust this accordingly. Stock Value Finally, all of the individual future discounted cash flows and the terminal value are combined into a current total business value. DCF Tool pulls the number of outstanding shares and divides the business value by the number of shares. This then gives us a stock price that correlates directly to the calculated net present (or intrinsic) value of the company…

Mar 29, 2021