DCF analysis AT&T Inc - Grade: A PDF

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DCF analysis AT&T Inc - Grade: A...

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Introduction To evaluate the attractiveness of an investment opportunity based on the company’s future cash flows at present, many analysts use the discounted cash flow valuation model. This assignment provides the Discounted Cash Flow Model Valuation of the AT&T Inc (T) that is prepared using the facilities of the ValuePro.net Valuation. AT&T Inc is the world’s largest telecommunications company and one of the largest media conglomerates. It provides landline and wireless services to companies, government organizations and wholesale clients around the world; Internet, voice, and video transmission services for private clients in the United States; and mobile services in the United States. The analysis includes three main sections: Discounted Cash Flow Model Valuation for the AT&T Inc and its analysis; the analysis of each variable used in the Model Valuation; the analysis of relevant cash flows, comparison of the final valuation and the stock’s current price, explanation of their differences. The information about AT&T and data used in this analysis have been retrieved from Nasdaq and Yahoo! Finance.

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DISCOUNTED CASH FLOW VALUATION MODEL

Discounted Cash Flow Model Valuation of AT&T’s stock

Excess Return

ValuePro.net

Valuated

Explanation the reasons for the

Assumptions 10

Assumptions 10

assumptions AT&T could earn returns on new

Period (years)

investments that are greater than its Cost of Capital during 10

Revenues ($ mil)

126968

160546

years. (ValuePro, n.d.) According to the AT&T’s Income Statement, the company’s consolidated revenue was $160,546 million U.S. in the

Growth Rate (%)

7

3.57

fiscal year 2017. Analysts at NASDAQ (2018) forecasted an average growth rate of 3.57% over the next five

Net Operating

15.96

14.9

Profit Margin (%)

years. The company made 14.9% of profit after paying its variable costs, but before paying interest or tax. It was calculated by dividing the operating income of $23,863 million U.S. by its total revenue of $160,546 million

Tax Rate (%)

32.642

-97.2

U.S. Negative rate has an effect of reducing the loss for the tax benefits to be received. AT&T’s tax rate of -97.2% was determined by dividing the income tax of $-14,708 million U.S. by its EBIT of $15,139

Stock Price ($)

35.54

29.36

million U.S. The stock price of the AT&T on November 23, 2018 was $29.36 per share.

DISCOUNTED CASH FLOW VALUATION MODEL 3 Shares of Stock

5422.8

7278.0

Outstanding (mil)

According to Yahoo! Finance, the AT&T currently has 7.278 billion of outstanding common

10 Yr. Treasury

5

3.05

Bond Yield (%)

shares. The current 10 Year Treasury Bond Yield, also used as a riskfree rate, is 3.05% (CNBC,

Bond Spread to Treasury (%) Preferred Stock

1.5 7.5

1.5

2018). The company has a 1.5% of

0

bond spread to treasury. AT&T does not have privileged

Yield (%)

shares; therefore, there is no

Depreciation Rate

preferred stock yield. Using the straight-line method,

14.24

16.57

(%)

the company’s depreciation rate was computed by dividing the deprecation and amortization of $26,609 million U.S. (GuruFocus, 2018) by its total revenue of $160,546 million U.S. it shows that the value of an asset is reduced at 16.57% each

Investment Rate

15.27

10.4

(%)

year. The investment rate of the company of 10.4% was determined by dividing capital expenditures of $16,695 million U.S. by the total revenue of

Working Capital (%)

-6.48

-1.4

$160,546 million U.S. Negative working capital of the AT&T shows that the company’s current liabilities exceeded its current assets. The working capital of -1.4% was calculated by dividing subtracting the

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DISCOUNTED CASH FLOW VALUATION MODEL

current liabilities of $81,389 million U.S. from the current assets of $79,146 million U.S. Therefore, the company has more short-term debt than shortShort Term Assets

20372

79146

($ mil) Short-Term

AT&T are $79,146 million U.S. 31533

81389

Liabilities ($ mil) Equity Risk

term assets. The short-term assets of the in the fiscal year 2017. The short-term liabilities of the AT&T are $81,389 million U.S.

3

5.08

Premium (%)

in the fiscal year 2017. Aswath Damodaran estimated equity risk premium as 5.08% for mature markets. It represents a 5.08% of return from investing in the stock market over the risk-

Company Beta for

0.735

0.46

Stock (Number)

free rate. According to the Yahoo! Finance, the AT&T’s beta coefficient is 0.46 that indicates the security is less volatile than the market, and the portfolio is

Book Value of Debt

70686

164346

Outstanding ($ mil)

less risky with its stock. The book value of debt includes the company’s long-term and short-term debt. Thus, the AT&T has a total debt outstanding of

Value Preferred

0

0

Stock Outstanding ($ mil) Company WACC (%)

$164,346 million U.S. The company does not have any preferred stock outstanding;

6.45

5.81

therefore, the value is zero. According to the GuruFocus (2018), the AT&T’s weighted average cost of capital is 5.81%.

DISCOUNTED CASH FLOW VALUATION MODEL 5 This rate the company is expected to pay on average to all its shareholders to finance its assets.

Comparison of the intrinsic value and the current market value The current market value of the AT&T’s stock is $29.36 that is lower than the estimated intrinsic value using the ValuePro Valuation Model. Market value is “based on the expectation today of the company’s future financial and operational performance” (Wright, n.d.). The company’s stock price is easily determined as it is traded on the stock market and is driven by public expectations, whereas the intrinsic value is driven by internal expectations. Intrinsic value gives the shareholders an approximate value of the company’s stock price. According to the ValuePro model, the intrinsic value of the AT&T’s is $50.43 that is higher than the current market value. The difference between the intrinsic value from the current market value means that the company’s stock is undervalued and is selling at a price significantly below its intrinsic value. Professor Aswath Damodaran made sense of these differences in his article about Intrinsic Valuation. He stated that there could be several possible explanations. First of all, there might be made erroneous or unrealistic assumptions about the company’s future growth potential or riskiness. Secondly, there is probably made incorrect assessments of risk premiums for the entire market. And thirdly, the market is making a mistake in its assessment of value. Cash Flow The free cash flow to the company (FCFE) calculated by the ValuePro.net from 0 to 10 years is presented below.

DISCOUNTED CASH FLOW VALUATION MODEL

Conclusion The Discounted Cash Flow Valuation Model is more comprehensive process of calculating the company’s value based on the forecasts of how much money the company is going to make in the future. Analysing this valuation model, one should take into account different factors that affect the company’s future revenue growth, operating profit margin, book value of debt, tax rate, risk-free rate, etc. these factors have an impact of the share price that enables the analysts to offer more realistic prices of the stocks. If the value of the company, which was reached through discounted cash flow valuation, is higher than its current value, the opportunity would be attractive. The AT&T has a low current value of $29.36 in comparison with its intrinsic value of $50.43 computed through DCF Valuation; however, it has an attractive opportunity.

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DISCOUNTED CASH FLOW VALUATION MODEL 7 References CNBC (2018). U.S. 10 Year Treasury. Retrieved from https://www.cnbc.com/quotes/? symbol=US10Y Damodaran,

A.

(n.d.).

Investment

(3 rd

Valuation

ed.).

Retrieved

from

http://people.stern.nyu.edu/adamodar/New_Home_Page/Inv3ed.htm Damodaran, A. (2018). Country Default Spreads and Risk Premiums. Retrieved from http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html Folger, J. (2017, May 1). Discounted Cash Flow Analysis. Investopedia. Retrieved from https://www.investopedia.com/university/dcf/ GuruFocus (2018). AT&T Inc Depreciation, Depletion and Amortization. Retrieved from https://www.gurufocus.com/term/DDA/NYSE:T/Depreciation,-Depletion-andAmortization/AT&T%20Inc GuruFocus

(2018).

AT&T

Inc

WACC.

Retrieved

from

https://www.gurufocus.com/term/wacc/T/WACC-Percentage/AT&T%20Inc Nasdaq. (2018, November 25). AT&T Analyst Forecasts Earning Growth. Retrieved from https://www.nasdaq.com/symbol/t/earnings-growth ValuePro

(2018).

The

ValuePro

Approach.

Retrieved

from

http://www.valuepro.net/cgi/valuate.pl Wright, T. (n.d.). Difference Between Market Value and Intrinsic Value. Retrieved from https://smallbusiness.chron.com/difference-between-market-value-intrinsic-value69232.html Yahoo!

Finance.

(2018,

November

https://finance.yahoo.com/quote/T?p=T

25).

T

Summary.

Retrieved

from

DISCOUNTED CASH FLOW VALUATION MODEL

Appendix Discounted Cash Flow Valuation Model

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