Key Insights

Using the 2 Stage Free Cash Flow to Equity, Howmet Aerospace fair value estimate is US$160 With US$157 share price, Howmet Aerospace appears to be trading close to its estimated fair value Analyst price target for HWM is US$164, which is 2.5% above our fair value estimate

Does the May share price for Howmet Aerospace Inc. (NYSE:HWM) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

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Is Howmet Aerospace Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) forecast

2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions)  US$1.22b US$1.53b US$1.80b US$2.18b US$2.53b US$2.80b US$3.02b US$3.22b US$3.40b US$3.55b Growth Rate Estimate Source Analyst x12 Analyst x12 Analyst x8 Analyst x4 Analyst x2 Est @ 10.49% Est @ 8.17% Est @ 6.54% Est @ 5.40% Est @ 4.61% Present Value ($, Millions) Discounted @ 6.7%  US$1.1k US$1.3k US$1.5k US$1.7k US$1.8k US$1.9k US$1.9k US$1.9k US$1.9k US$1.9k

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$17b

Story Continues

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.8%. We discount the terminal cash flows to today's value at a cost of equity of 6.7%.

Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$3.6b× (1 + 2.8%) ÷ (6.7%– 2.8%) = US$91b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$91b÷ ( 1 + 6.7%)10= US$48b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$65b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$157, the company appears about fair value at a 1.6% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.NYSE:HWM Discounted Cash Flow May 10th 2025

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Howmet Aerospace as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.7%, which is based on a levered beta of 0.921. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Check out our latest analysis for Howmet Aerospace

SWOT Analysis for Howmet Aerospace

Strength

Earnings growth over the past year exceeded the industry.

Debt is well covered by earnings and cashflows.

Weakness

Dividend is low compared to the top 25% of dividend payers in the Aerospace & Defense market.

Opportunity

Annual earnings are forecast to grow faster than the American market.

Current share price is below our estimate of fair value.

Threat

Revenue is forecast to grow slower than 20% per year.

Looking Ahead:

Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Howmet Aerospace, we've put together three fundamental items you should consider:

Risks: For example, we've discovered 2 warning signs for Howmet Aerospace that you should be aware of before investing here. Future Earnings: How does HWM's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart. Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

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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.