We do this to reflect that growth tends to slow more in the early years than it does in later years. 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. 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.
In the first stage we need to estimate the cash flows to the business over the next ten years. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. See our latest analysis for Skyline Champion What's The Estimated Valuation?
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 would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Believe it or not, it's not too difficult to follow, as you'll see from our example! We will take advantage of the Discounted Cash Flow (DCF) model for this purpose.
Does the September share price for Skyline Champion Corporation ( NYSE:SKY) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value.
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