The Brink's Company (NYSE:BCO) Shares Could Be 47% Below Their Intrinsic Value Estimate
Key Insights
- The projected fair value for Brink's is US$218 based on 2 Stage Free Cash Flow to Equity
- Brink's is estimated to be 47% undervalued based on current share price of US$117
- Analyst price target for BCO is US$134 which is 39% below our fair value estimate
In this article we are going to estimate the intrinsic value of The Brink's Company (NYSE:BCO) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
The Model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
| 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | 2035 | |
| Levered FCF ($, Millions) | US$443.3m | US$466.1m | US$487.4m | US$507.8m | US$527.6m | US$547.2m | US$566.8m | US$586.5m | US$606.6m | US$627.0m |
| Growth Rate Estimate Source | Est @ 5.95% | Est @ 5.14% | Est @ 4.58% | Est @ 4.18% | Est @ 3.91% | Est @ 3.71% | Est @ 3.58% | Est @ 3.48% | Est @ 3.42% | Est @ 3.37% |
| Present Value ($, Millions) Discounted @ 8.4% | US$409 | US$397 | US$383 | US$368 | US$353 | US$337 | US$322 | US$308 | US$294 | US$280 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$3.4b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 3.3%. We discount the terminal cash flows to today's value at a cost of equity of 8.4%.
Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$627m× (1 + 3.3%) ÷ (8.4%– 3.3%) = US$13b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$13b÷ ( 1 + 8.4%)10= US$5.6b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$9.1b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$117, the company appears quite good value at a 47% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Brink's 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 8.4%, which is based on a levered beta of 1.112. 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.
See our latest analysis for Brink's
SWOT Analysis for Brink's
- Earnings growth over the past year exceeded the industry.
- Dividends are covered by earnings and cash flows.
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Commercial Services market.
- Annual earnings are forecast to grow faster than the American market.
- Good value based on P/E ratio and estimated fair value.
- Debt is not well covered by operating cash flow.
- Annual revenue is forecast to grow slower than the American market.
Moving On:
Whilst important, the DCF calculation is only one of many factors that you need to assess for 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Brink's, there are three relevant elements you should explore:
- Risks: As an example, we've found 1 warning sign for Brink's that you need to consider before investing here.
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for BCO'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.
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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.