Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Fastenal Company (NASDAQ:FAST) as an investment opportunity by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
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.
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 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
| US$1.01b | US$1.07b | US$1.20b | US$1.32b | US$1.47b | US$1.58b | US$1.68b | US$1.77b | US$1.85b | US$1.93b | |
| Analyst x6 | Analyst x6 | Analyst x4 | Analyst x2 | Analyst x1 | Est @ 7.84% | Est @ 6.32% | Est @ 5.25% | Est @ 4.50% | Est @ 3.97% | |
| US$945 | US$934 | US$975 | US$1k | US$1.0k | US$1.0k | US$1.0k | US$1.0k | US$996 | US$967 |
("Est" = FCF growth rate estimated by Simply Wall St)
= US$10.0b
