🛣️✈️Business Overview

🎯Key Metrics

Total: 2/17

• +1 ✅ Projected Operating Margin: 12.99%

• +0 ⚠️ Projected 5-Year Revenue CAGR: 1.50%

• +0 ⚠️ Last 5-Year ROIC: 9.72%

• +1 ✅ Estimated Cost of Capital: 7.04% (less than ROIC)

• +1 ✅ Last 5-Year Shares Outstanding CAGR: -0.40%

• -1 ❌ Projected 5-Year EPS CAGR: 8.00% (given the ease of manipulating earnings metrics, sub-10% growth warrants caution)

• +0 ⚠️ Projected 5-Year Dividend CAGR: 5.42%

• +1 ✅ Moody’s Rating: A3

• -1 ❌ Morningstar Moat: Narrow

• +0 ⚠️ Morningstar Uncertainty: Medium

📈 Vinci operates with solid margins above 10%, with good capital allocation given its ROIC higher than the estimated cost of capital.

📉 The company shows modest revenue and EPS growth, and its Narrow moat within a cyclical industry warrants some caution for the next couple of years.

Let’s value the company, to check if the current market prices are justified.

📝Business Valuation

To calculate the intrinsic value of the company I’ll use multiple methods:

• Discounted Cash Flows (DCF) – Intrinsic value is estimated by projecting its free cash flows over the next 10 years and discounting them to present value using the estimated cost of capital;

• Historical P/B – we assume mean reversion to the historical P/B values;

• DDM – the fair value is estimated by projecting the dividend payments across the following years and discounting them to the present value using the estimated Cost of Capital;

• EPS Growth – the fair value is estimated by projected the Earnings Per Share CAGR for the next 5 Years and then, given its current and historic values of PE, come up with a PE for the 5th Year. This will give us its price 5 Years from now using the formula: Price = EPS x PE that we then discount using the estimated cost of capital;

• Historical P/CF – we assume mean reversion to the historical P/CF values;

• Historical Dividend Yield – we assume mean reversion to the historical dividend yield;

• Historical P/S – we assume mean reversion to the historical P/S values.

I’ve tried to pick and choose the methods that are most correlated, during the previous couple of years, with the movement of the stock price.

Cost of Capital

I’ve used the latest annual financial statement of the company, the 10-Year Germany bonds as the risk free rate (for companies residing in Euro countries is what I normally use) and revenue geographic exposure to come up with its cost of capital, cost of debt and cost of equity.

Cost of Capital: 7.04%.

This value will be used later as a discount rate in the valuation methods.

Please feel free to come up with your own values by using the tool I’ve used: Cost of Capital – The Fair Value Journal. It is and will ever be completely free 🙂

Discounted Cash Flows (Weight: 28%)

I’ve used the latest annual financial statement of the company, the analyst estimates for both revenue and margins and the cost of capital calculated previously.

This gives us a estimated fair value of 145.52 euros for Vinci.

We can also do some Monte Carlo simulations to execute multiple DCF valuations. Each simulation will randomize the inputs between some pre-defined values. For this I also used analysts estimates.

As you can see from the above Vinci seems to be fairly valued, using DCF, because it is currently being priced at around the median. From these simulations we can extrapolate that there’s 50% probability that the stock is undervalued and 50% probability that the stock is overvalued at the current price.

Please be free, as before, to fill in your own values. Make the valuation your own and do yourself a DCF valuation using your own assumptions: DCF – The Fair Value Journal

Historical P/B (Weight: 23%)

The current P/B (Price / Book) ratio is above its 10 Year average. This means that the company is overvalued by this metric. Assuming a mean reversion to its historical average of 2.26 we can assume a fair value of 123.51 euros.

For every type of historical and relative valuation you can use the same free tool: Historical / Relative Valuation – The Fair Value Journal

DDM – Variable Growth (Weight: 18%)

Now we look at a Dividend Discount Model (DDM). This will allow us to value the company, using its dividend payments and the overall growth of it. In this type of DDM we’ll set the dividend to grow at an initial rate that then over time moderates and declines to a given terminal stable growth that will be maintained “forever”.

For the stable growth, I normally use the growth rate of the economy the company is based on, namely the 10-Year bonds of the currency used by that economy country. The same as before, here we’re using the 10 Year bonds of Germany.

As you can see below I started the dividend growth at 5.42% (analysts expectations) and then slowly the growth moderates to 2.81% (the risk free rate – 10-Yr bonds of Germany). Also note the use of the Cost of Equity, calculated previously when we also calculated the Cost of Capital.

Why use Cost of Equity and not Cost of Capital as the discount rate for DDM? Its because dividends are paid to equity holders after debt obligations. Since DDM values equity-only cash flows, we use an equity-only discount rate (the Cost of Equity).

Then, as always, we can also use a Monte Carlo simulation to dive deeper into the valuation 🤓

As you can see from the above Vinci seems to be overvalued given that its current price is well above P90. From these simulations we can extrapolate that there’s more than 90% probability that the stock is overvalued at the current price.

As always take this single output, from this DDM valuation method, with a grain of salt. Let’s move on to the other valuation methods to get a clearer picture. Also note that this method will undervalue a company that pay less of its free cash flow in dividends (a lower payout ratio), that could be the case here.

Please be free to use the same free tool I’ve created here: DDM (Variable) – The Fair Value Journal

EPS Growth (Weight: 13%)

For this valuation method, I’ve used the current EPS and the analysts estimates of EPS growth. I also assumed a 15 PE for the company, in line with its historical averages.

Then again used the Monte Carlo simulations to check what happens when the input values change within a specified range:

Using this valuation method, Vinci seems to be fairly valued being currently priced very close to the median. From this we can extrapolate that there’s 50% probability of the stock being undervalued and 50% probability of the stock being overvalued. This valuation output seems to be in line with what we’ve seen previously on the DCF.

As before, feel free to try this yourself: EPS Growth – The Fair Value Journal

Historical P/CF (Weight: 10%)

The current P/CF (Price / Free Cash Flow) ratio is around its 10 Year average. This means that the company is fairly valued by this metric. Assuming a mean reversion to its historical average of 8.84 we can assume a fair value of 141.18 euros.

Historical Dividend Yield (Weight: 5%)

The current Dividend Yield ratio is above its 10 Year average. This means that the company is undervalued by this metric. Assuming a mean reversion to its historical average of 3.15% we can assume a fair value of 150.82 euros.

Historical P/S (Weight: 3%)

The current P/S (Price / Sales) ratio is around its 10 Year average. This means that the company is fairly valued by this metric. Assuming a mean reversion to its historical average of 0.96 we can assume a fair value of 131.40 euros.

✍️Summary

Now that we did all the heavy work, let’s take the above and come up with the company weighted average fair value.

I basically take each valuation method used and given my confidence on the company apply a 20% or 10% discount (when to buy) and addition (when to sell) or use the Monte Carlo P10, P20, P80 and P90 values:

Feel free to choose your own values, but for me I will pick a fair value of 101.08 euros given the uncertainty and volatility of the industry the company operates in.

Overall it seems Vinci is overvalued at the current prices or at least a little overvalued.

Fair Value: 101.08 euros