According to a two-stage Discounted Cash Flow (DCF) model, the fair value projection for United States Steel is $39.02 per share. Currently trading at $23.61 per share, this suggests that the company is potentially undervalued by 39%.
The DCF model takes into account two stages of growth. The first stage considers the next ten years of cash flows, using analyst estimates when available, and extrapolating previous free cash flow values when necessary. The growth rate is adjusted to reflect that growth tends to slow more in the early years.
The second stage, also known as the Terminal Value, calculates the business’s cash flow beyond the first stage using the Gordon Growth formula. Terminal Value is discounted to the present value.
The total equity value is determined by summing the present value of future cash flows, which results in a value of $8.7 billion. Dividing this value by the total number of shares outstanding, the intrinsic value per share is estimated.
Compared to the current share price of $23.61, the company appears to be undervalued by 39%.
It is important to note that valuations are imprecise and subject to change. Additionally, the DCF model does not consider industry cyclicality or a company’s future capital requirements. Therefore, it is crucial for potential shareholders to conduct their own analysis and make their own assumptions about the company’s future performance.
In conclusion, while the DCF model suggests that United States Steel is undervalued as an investment opportunity, it is essential to consider other factors and conduct a comprehensive evaluation before making any investment decisions.
