Avient Corporation (NYSE:AVNT) Shares Could Be 48% Below Their Intrinsic Value Estimate

In this article, we will estimate the intrinsic value of Avient Corporation (NYSE: AVNT) by estimating the company’s future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you can’t figure it out, just read on! It’s actually a lot less complex than you might imagine.

Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.

Check out our latest review for Avient

Is Avient valued enough?

We use what is called a 2-step model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.

A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:

Estimated free cash flow (FCF) over 10 years

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Leveraged FCF ($, millions) $305.2 million $320.5 million $333.6 million $345.1 million $355.4 million $364.9 million $373.9 million $382.5 million $390.9 million $399.2 million
Growth rate estimate Source Analyst x2 Is at 5.02% Is at 4.09% Is at 3.45% Is @ 3% Is at 2.68% Is at 2.46% East @ 2.3% Is at 2.19% Is at 2.12%
Present value (millions of dollars) discounted at 7.0% $285 $280 $273 $264 $254 $244 $233 $223 $213 $204

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $2.5 billion

After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (1.9%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 7.0%.

Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = $399 million × (1 + 1.9%) ÷ (7.0%–1.9%) = $8.1 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= $8.1 billion ÷ (1 + 7.0%)ten= $4.1 billion

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is $6.6 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of US$38.0, the company looks quite undervalued at a 48% discount to the current share price. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.

NYSE: AVNT Cash Flow Update September 16, 2022

The hypotheses

Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. The DCF also does not take into account the possible cyclicality of an industry, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Avient 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 takes debt into account. In this calculation, we used 7.0%, which is based on a leveraged beta of 1.184. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Let’s move on :

While a business valuation is important, it shouldn’t be the only metric to consider when researching a business. The DCF model is not a perfect stock valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can significantly change the overall result. Why is the stock price below intrinsic value? For Avient, we’ve put together three important things you should consider in more detail:

  1. Risks: For example, we found 1 warning sign for Avient that you must consider before investing here.
  2. Future earnings: How does AVNT’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
  3. Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!

PS. The Simply Wall St app performs a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, search here.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

Valuation is complex, but we help make it simple.

Find out if Avient is potentially overvalued or undervalued by viewing our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider trading and financial health.

See the free analysis

Comments are closed.