Now that we have the value of all the cash flows from Year 1 through 10 as well as those from Year 11 on, we add up these two values:
Discounted Free Cash Flow, Years 1-10: $5,870 million
+ Discounted Free Cash Flow, Years 11 on: $9,311 million
which equals $15,181 million.
So there we have it! We have estimated Charlie's Bicycles to be worth $15.2 billion. The final, simple step is to divide this $15.2 billion value by the number of shares Charlie's Bicycles has outstanding. If Charlie's has 100 million shares outstanding, then our estimate of Charlie's intrinsic value is $152 per share.
If Charlie's stock is trading at $100 per share, you should start to get interested in buying the shares. We can forget about what Charlie's P/E ratio is relative to its peers as well as what Wall Street analysts have recently said about the stock. The bottom line is the stock is trading below its estimated intrinsic value. If you have confidence in your free cash flow projections, you can have an equal amount of confidence in buying the stock.
The Bottom Line >>