Expected stock price 2 to 5 years from now

You're representing yourself as a 3+ year analyst in Equity Research and you posted in the I-banking forum, so I'm really confused by this question. Are you really a 3rd year equity research analyst?

Assuming you are ...

What project is this question related to? (i.e., what are you trying to find out?)

If you are looking for the expected value at any point in time based on a cash flow projection, then it's just basic PV/FV math moving forward or backward in time.

I have been in a boutique in Europe and haven't done a lot of modeling - more research and sourcing than a thorough analysis. I have been assigned this task and don't want to screw up.

Basically I want to estimate the stock price of a company some time in the future. I can do the DCF and get the price of a particular stock as of now, but I want to see where the price may go based on my projections in 2012-2015. So I thought for 2012, i would project 2011-2012 and then TV for 2013. I would only take the FCF for the TV ,and divide it by WACC-r, not counting the FCF for 2011-2012, substract the projected debt outstanding and add (hypothetically) any cash that has been generated and that is non-operating. I want to know if the stock is currently trading at 10, what will it trade for in 2015 based on my assumptions. Is this the right approach?

I would just figure out what multiple you'd expect the thing to trade off based on future projections of EBITDA/EBIT/Sales/Earnings/Etc. and then adjust accordingly.

For example: Say their P/E right now is 10x based on the most current earnings (stock @ $20, eps @ $2.00/sh). If you'd expect earnings to move to $4.00/sh, and investors to pay the same 10x multiple, the stock would double to $40.

Thanks, a multiple is a good idea. Would you say that my DCF approach is doable as well?

You should do both, naturally. It is of course doable and if I was looking for you to value a company 2 years from now I would expect more than a simple look at multiple expansion/contraction

You could also use V=D(1+g)/(k+g), however, the drawback is the fact that it assumes constant growth and required return. Since most companies have som standard of retention ratio (b) and ROE, it would not be a problem to solve for g (growth)

g=ROExb k= required rate of return D= dividend

I do not know the company you are researching (volatility), therefor I don't know if the periode (2-5 years) is to long for the fomula to have any prediction power.

pindur - here's what I meant by moving forward or backward in time:

If you have 5 years of CFs and a terminal value, how do you determine PV today? Discount all of those cash flows back to today, of course, which is what you've done.

But what about 1 year from now? You take the year 1 CF and get the FV of that 1 year from now, then discount all the remaining CFs by 1 less year than you did in the first example. Now you know the PV 1 year from now.

Basically, compound or discount all the cash flows to the year you want to find the value. There is no need to change your CF projections.

Let me know if that doesn't make sense.

-JB

I usually just pick a number in 3 years and 5 years and back into it! that's what most these guys do anyway,

JB - not sure exactly what do you mean. I have unlevered FCF year 1 $91.4, year 2 $157.7, year 3 $224.7, use WACC of 11%, mid-year discount period, 20m shares. For the first year, I would get FV $91.4*(1+11%) = $101.4. But what about the rest up to year 3 to get price per share? Thanks

You just need to get all of the CFs in the same year.

For the first year, you've done that by moving it forward one year. The 2nd year CF is already in year 2 so just use $157.7. The 3rd year CF needs to be dicsounted one year to get it into Year 2 - so 224.7/(1.11) = 202.4.

You need a terminal value, so assuming that is in year 3 you'd discount that back one year as well.

Ok,Can I send you a basic spreadsheet with the calculations for a quick check? Thanks

whatever methodology you use, it'll be pie in the sky. i'd just run an operating model w/ 3 statements to project net income over the next 3-5 years, and assume share count is the same then as it is today (unless you have info otherwise)...then you can back into share price based on some kind of historical p/e multiple...or you can run the same model and base your share price off an ebitda multiple, then strip out debt and divide by your share count.