Is Commercial Metals Company (NYSE:CMC) Trading At A 27% Discount?

In This Article:

Key Insights

  • Commercial Metals' estimated fair value is US$83.77 based on 2 Stage Free Cash Flow to Equity

  • Commercial Metals is estimated to be 27% undervalued based on current share price of US$61.41

  • Analyst price target for CMC is US$63.00 which is 25% below our fair value estimate

In this article we are going to estimate the intrinsic value of Commercial Metals Company (NYSE:CMC) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Commercial Metals

Crunching The Numbers

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. 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

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$139.0m

US$628.7m

US$545.0m

US$561.0m

US$581.0m

US$576.6m

US$578.2m

US$583.8m

US$592.3m

US$603.0m

Growth Rate Estimate Source

Analyst x2

Analyst x3

Analyst x1

Analyst x1

Analyst x1

Est @ -0.75%

Est @ 0.26%

Est @ 0.97%

Est @ 1.46%

Est @ 1.81%

Present Value ($, Millions) Discounted @ 7.6%

US$129

US$543

US$437

US$419

US$403

US$372

US$346

US$325

US$306

US$290

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$3.6b

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 (2.6%) 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 7.6%.

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