Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Barrick Gold fair value estimate is CA$37.55
- Barrick Gold is estimated to be 40% undervalued based on the current share price of CA$22.68
- The US$29.68 analyst price target for ABX is 21% less than our estimate of fair value
Does the June share price for Barrick Gold Corporation (TSE:ABX) truly reflect its intrinsic value? Today, we will estimate the stock’s intrinsic value by evaluating the company’s future cash flows and discounting them to their present value. One commonly used method for this is the Discounted Cash Flow (DCF) model. Despite its apparent complexity, the DCF model is an essential tool for determining a company’s worth.
Crunching The Numbers
One way we can estimate intrinsic value is through a 2-stage model. This model involves projecting cash flow growth rates for two distinct periods: a phase of higher growth followed by a phase of lower growth. By estimating the next ten years of cash flows, we get a clearer picture of a company’s value.
10-year free cash flow (FCF) forecast
| 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
| Levered FCF ($, Millions) | US$1.18b | US$2.13b | US$2.34b | US$2.09b | US$2.82b | US$3.00b | US$3.14b | US$3.27b | US$3.38b | US$3.48b |
| Growth Rate Estimate Source | Analyst x14 | Analyst x14 | Analyst x9 | Analyst x3 | Analyst x1 | Est @ 6.06% | Est @ 4.87% | Est @ 4.03% | Est @ 3.45% | Est @ 3.04% |
| Present Value ($, Millions) Discounted @ 7.6% | US$1.1k | US$1.8k | US$1.9k | US$1.6k | US$2.0k | US$1.9k | US$1.9k | US$1.8k | US$1.7k | US$1.7k |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$17b
The DCF approach emphasizes that a dollar in the future is worth less than a dollar today. By discounting future cash flows, we arrive at the present value. Additionally, the Terminal Value, calculated using the Gordon Growth formula, adds the cash flow beyond the initial growth stage. This yields the Total Equity Value, US$48b in this case, which when divided by the number of shares outstanding, gives a 40% discount to the current share price.
Important Assumptions
Key to a DCF valuation are the discount rate and actual cash flows. Adjusting these parameters can significantly impact the result. It’s also important to consider industry cyclicality and a company’s capital needs, which a DCF may not fully capture. For Barrick Gold, we’ve used a cost of equity as the discount rate, based on a beta of 1.205. SWOT Analysis for Barrick Gold
SWOT Analysis for Barrick Gold
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- Dividend is low compared to the top 25% of dividend payers in the Metals and Mining market.
- Annual earnings are forecast to grow faster than the Canadian market.
- Good value based on P/E ratio and estimated fair value.
- Dividends are not covered by cash flow.
- Annual revenue is forecast to grow slower than the Canadian market.
Looking Ahead
While the DCF model is valuable, it should not be the sole basis for investment decisions. It’s crucial to consider multiple factors and scenarios to derive a comprehensive view. Furthermore, understanding why a stock trades below intrinsic value is key. For Barrick Gold, examining risks, management, and other strong businesses in the sector can provide valuable insights.
- Risks: Identify and assess the risks associated with Barrick Gold to make informed decisions.
- Management: Evaluate insider activities and overall governance to gauge the company’s future prospects.
- Other Solid Businesses: Explore companies with strong fundamentals to diversify your investment portfolio.
Valuation is complex, but we’re helping make it simple.
Find out whether Barrick Gold is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions, and financial health.
View the Free Analysis
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@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.
Additional Insight:
– While the DCF model provides valuable insights into the intrinsic value of Barrick Gold, it is essential to consider other factors such as industry cyclicality and capital needs for a comprehensive analysis.
– SWOT analysis for Barrick Gold highlights key strengths, weaknesses, opportunities, and threats that investors should consider.
– Looking ahead, assessing risks, evaluating management, and exploring other strong businesses in the sector can help investors make informed decisions beyond just relying on a DCF valuation.
