Textron Inc (NYSE:)., a prominent multi-industry corporation, may be undervalued by 36%, according to a valuation based on the 2 Stage Free Cash Flow to Equity model. The company’s current share price sits at US$76.13, while the estimated fair value is US$119, a significant difference from the analyst-projected price target of US$85.86.
The valuation process used the Discounted Cash Flow (DCF) model, which estimates a company’s intrinsic value by forecasting its future cash flows and discounting them to their present value. The DCF model operates under the principle that a dollar today is worth more than a dollar in the future. As such, it aggregates future cash flows and discounts them to their current value. For Textron, the present value of its projected 10-year cash flow stands at an estimated US$8.2 billion.
This valuation approach employed a 2-stage growth model that considers two phases of a company’s growth – an initial period of potentially higher growth followed by a stage of stable growth. This methodology required estimations of Textron’s cash flows for the next decade. In instances where analyst estimates were not available, extrapolations were made from previous free cash flow (FCF) values.
However, it’s crucial to note that while the DCF is an effective tool for estimating intrinsic value, it may not always be ideal due to its dependence on assumptions about future growth rates and cash flows. For companies experiencing declining free cash flow, it was assumed that their rate of shrinkage would slow down; conversely, for those with expanding free cash flow, it was projected that their growth rate would decelerate over time.
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