An Overview of the Intrinsic Value of ONEOK, Inc.

We will be discussing a method of estimating the intrinsic worth of ONEOK, Inc. today (NYSE:OKEYou can do this by taking the future cash flows and then discounting them to their current value. This is possible using the Discounted Cash flow (DCF) model. Don’t think that you won’t understand it. It is actually much simpler than you might imagine.

Companies can be valued in many different ways. Therefore, a DCF may not work for everyone. If you are interested in learning more about intrinsic value, please take a look at the Simply Wall St analysis model.

Check out our latest analysis for ONEOK

What is the Estimated Value?

The two-stage DCF model will be used. It takes into consideration two stages of growth. The first stage generally represents a longer period of high growth that ends at the terminal value. This is usually captured in the second period of steady growth. To start with, we need estimates of the next ten cash flows. We use analyst estimates whenever possible. However, if these are not available, we extrapolate previous free cash flow (FCF), from the last estimate/reported value. Assume that companies with declining free cash flows will slow down their rate of shrinkage. Companies with growing free money flow will see a slower growth rate. This is because growth tends to slow down more in the beginning years than in the later years.

It is generally assumed that a dollar today has more value than a future dollar. To arrive at an estimate of the present value, we need to subtract the sum of future cash flows.

Forecast for 10-years of free cash flow (FCF).

(“Est”) = FCF growth rate calculated by Simply Wall St
Current Value of 10-year Cash Flow (PVCF). = US$14b

After calculating future cash flow projections over the initial period of 10 years, the Terminal Value is calculated. This accounts for future cash flow projections beyond that first stage. Because of many reasons, a conservative growth rate cannot exceed a country’s GDP growth. We used the 5-year-old average yield of the 10-year government bonds (2.0%) in this example to forecast future growth. As with the 10-year “growth” period, future cash flows are also discounted to today’s value using a cost equity of 10%.

Terminal Value (TV).= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$2.5b× (1 + 2.0%) ÷ (10%– 2.0%) = US$30b

Present Value of the Terminal Value (PVTV).= TV / (1+ r)¹⁰= US$30b÷ ( 1 + 10%)¹⁰= US$11b

The sum of future cash flows plus the present value is called equity. This is US$25b. The equity value is then divided by the number outstanding shares. At the time of writing, the company is roughly fair value relative to its current share price at US$65.6. Any assumptions made in any calculation can have a significant impact on the valuation. Therefore, it is best to see this as an estimate and not exact down to the cent.

The Assumptions

We’d like to point out that the main inputs to a discounted flow of cash are the discount rate, and the actual cash flows. You can also invest by evaluating a company’s future performance. So, you might try to calculate it yourself and verify your assumptions. The DCF doesn’t take into consideration the potential cyclicality in an industry or future capital needs of a company, so it is not a comprehensive picture of a company’s potential performances. Because we are considering ONEOK as potential shareholders in the DCF, the cost-of-equity is used as the discount rate. This is different from the cost capital (or weighted average capital cost, WACC), which accounts for debt. We used 10%, which is based upon a beta of 1.499. Beta measures a stock’s volatility in relation to the overall market. Our beta is determined from the industry’s average beta of globally comparable businesses. There is an imposed limit of between 0.8 and 2.0. This is a reasonable range to ensure a stable business.

SWOT Analysis for OneOK

Strength

Weakness

Opportunity

Threat

Next steps:

In terms of building an investment thesis, the valuation of a company is only one part of the equation. A DCF model cannot guarantee a reliable valuation. It should be used as a guideline to determine “what assumptions are necessary for this stock’s under/overvaluation.” The result can be dramatically altered if the terminal growth rate is slightly adjusted. Three other aspects of ONEOK are worth further investigation:

1. There are risks: 3 warning signs for ONEOK (1) should not be overlooked! You should know these things before you invest here.

2. Future Earnings: How does OKE compare to its peers or the market? Interact with our team to learn more about the consensus number of analysts for the next years. free analyst growth expectation chart.

3. Other solid businessesA strong business is built on low debt, high returns of equity and solid past performance. Explore! our interactive list of stocks with solid business fundamentals Check out other companies to see if they might be worth your consideration!

PS. PS. To find out the calculation for other stocks, click here search here.

Let us know what you think about this article. Have a question about the content? Get in touch Get in touch with us. Alternatively, email editorial-team (at) simplywallst.com.

This article is by Simply Wall St. It is general in nature. Our commentary is based on historical data, analyst forecasts and other unbiased information. We do not intend to provide financial advice. It is not a recommendation not to buy or sell any stocks and it doesn’t take into account your objectives or financial situation. Our aim is to give you long-term focused analysis that is based on fundamental data. Our analysis may not take into account the most recent price-sensitive company announcements and qualitative material. Simply Wall St holds no position in any of the stocks mentioned.

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