Estimating The Intrinsic Value Of ITT Inc. (NYSE:ITT)

In This Article:

Key Insights

  • ITT's estimated fair value is US$187 based on 2 Stage Free Cash Flow to Equity

  • Current share price of US$153 suggests ITT is potentially trading close to its fair value

  • The US$165 analyst price target for ITT is 12% less than our estimate of fair value

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of ITT Inc. (NYSE:ITT) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for ITT

What's The Estimated Valuation?

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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$520.6m

US$578.9m

US$641.8m

US$681.9m

US$713.8m

US$742.9m

US$769.8m

US$795.5m

US$820.3m

US$844.6m

Growth Rate Estimate Source

Analyst x5

Analyst x3

Analyst x2

Analyst x1

Est @ 4.68%

Est @ 4.07%

Est @ 3.63%

Est @ 3.33%

Est @ 3.12%

Est @ 2.97%

Present Value ($, Millions) Discounted @ 6.9%

US$487

US$507

US$525

US$522

US$511

US$498

US$483

US$466

US$450

US$433

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$4.9b

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. 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 2.6%. We discount the terminal cash flows to today's value at a cost of equity of 6.9%.

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