Advertisement
Australia markets closed
  • ALL ORDS

    8,206.10
    +72.70 (+0.89%)
     
  • ASX 200

    7,959.30
    +69.70 (+0.88%)
     
  • AUD/USD

    0.6786
    +0.0024 (+0.35%)
     
  • OIL

    82.18
    -0.44 (-0.53%)
     
  • GOLD

    2,416.00
    -5.90 (-0.24%)
     
  • Bitcoin AUD

    88,624.48
    +2,296.90 (+2.66%)
     
  • CMC Crypto 200

    1,250.25
    +51.68 (+4.31%)
     
  • AUD/EUR

    0.6218
    +0.0001 (+0.02%)
     
  • AUD/NZD

    1.1082
    -0.0002 (-0.02%)
     
  • NZX 50

    12,134.97
    +76.68 (+0.64%)
     
  • NASDAQ

    20,331.49
    +120.13 (+0.59%)
     
  • FTSE

    8,252.91
    +29.57 (+0.36%)
     
  • Dow Jones

    40,000.90
    +247.15 (+0.62%)
     
  • DAX

    18,748.18
    +213.62 (+1.15%)
     
  • Hang Seng

    18,293.38
    +461.05 (+2.59%)
     
  • NIKKEI 225

    41,190.68
    -1,033.34 (-2.45%)
     

An Intrinsic Calculation For DT Midstream, Inc. (NYSE:DTM) Suggests It's 27% Undervalued

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, DT Midstream fair value estimate is US$93.27

  • DT Midstream's US$68.30 share price signals that it might be 27% undervalued

  • Analyst price target for DTM is US$66.06 which is 29% below our fair value estimate

Today we will run through one way of estimating the intrinsic value of DT Midstream, Inc. (NYSE:DTM) by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!

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. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

ADVERTISEMENT

See our latest analysis for DT Midstream

Step By Step Through The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. 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. 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 discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

Levered FCF ($, Millions)

US$420.0m

US$450.7m

US$510.5m

US$550.0m

US$599.0m

US$636.1m

US$668.2m

US$696.6m

US$722.3m

US$746.1m

Growth Rate Estimate Source

Analyst x4

Analyst x4

Analyst x3

Analyst x1

Analyst x1

Est @ 6.20%

Est @ 5.05%

Est @ 4.25%

Est @ 3.69%

Est @ 3.30%

Present Value ($, Millions) Discounted @ 8.7%

US$387

US$382

US$398

US$395

US$396

US$387

US$374

US$359

US$342

US$325

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$3.7b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.7%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$746m× (1 + 2.4%) ÷ (8.7%– 2.4%) = US$12b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$12b÷ ( 1 + 8.7%)10= US$5.3b

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. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$68.3, the company appears a touch undervalued at a 27% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 DT Midstream 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 8.7%, which is based on a levered beta of 1.363. 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.

SWOT Analysis for DT Midstream

Strength

  • Earnings growth over the past year exceeded the industry.

  • Debt is well covered by earnings and cashflows.

Weakness

  • Earnings growth over the past year is below its 5-year average.

  • Dividend is low compared to the top 25% of dividend payers in the Oil and Gas market.

Opportunity

  • Annual earnings are forecast to grow for the next 3 years.

  • Trading below our estimate of fair value by more than 20%.

Threat

  • Dividends are not covered by cash flow.

  • Annual earnings are forecast to grow slower than the American market.

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Can we work out why the company is trading at a discount to intrinsic value? For DT Midstream, we've put together three additional aspects you should look at:

  1. Risks: As an example, we've found 2 warning signs for DT Midstream that you need to consider before investing here.

  2. Future Earnings: How does DTM's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. 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. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.