How ATLAS calculates Fair Value

The short version

For each company ATLAS runs two valuations and combines them. The first is a discounted cash flow (DCF): it projects the free cash flow for ten years and discounts it back to today. The second compares the company with listed peers in the same industry using price-to-earnings and EV/EBITDA multiples. When both work, the fair value is their geometric mean. When only one works, that one is used and the confidence level is lowered.

What goes in

• Reported financial statements: the last four to five fiscal years plus the trailing twelve months. For US companies these come from SEC filings; for other markets from the stored financial statements of a market-data provider, converted at daily exchange rates.
• The latest closing price, shares outstanding and net debt.
• A risk-free rate: the 10-year US Treasury yield for US companies, and a country-specific government yield for other markets where available.
• Beta, measured against the market when there is enough history, otherwise the data provider figure. ATLAS shrinks it towards 1 (two thirds measured, one third 1) and keeps it between 0.6 and 2.
• Analyst consensus growth for the next five years, when available.
• Peers: companies in the same industry (the same country first), and the wider sector when too few peers have usable ratios.

Method 1: discounted cash flow

The starting point is free cash flow over the last twelve months. If that figure is far from the company's normal level (more than 1.6 times, or below 0.6 times, a "normalised" figure equal to revenue times the median free cash flow margin of recent years, and revenue is growing), ATLAS uses the normalised figure instead. After-tax interest is added back, so the cash flow belongs to all capital providers and net debt is then subtracted.

The cash flow is grown for ten years: years 1 to 5 at the starting growth rate, years 6 to 10 at half of it (never below the long-term rate), then a terminal value.

• Starting growth: the analyst consensus for the next five years when available (limited to 0 to 25 percent a year); otherwise the lower of the company's own historical free cash flow growth and revenue growth (limited to 2.5 to 20 percent); 5 percent if there is no history.
• Long-term growth: 2.5 percent, lowered to the risk-free rate minus 0.5 points (minimum 1 percent) when rates are low. In high-rate currencies it is the risk-free rate minus 3.5 points, up to 10 percent.
• Discount rate: a weighted average cost of capital. Cost of equity is the risk-free rate plus adjusted beta times a 5 percent equity risk premium. Cost of debt is the reported interest divided by debt, never below the risk-free rate plus 1 point. Weights use market capitalisation and debt, tax uses the company's effective rate (21 percent if not usable). The result is rounded to 0.25 and kept in a sensible corridor (at least long-term growth plus 4 points and the risk-free rate plus 2; at most 16 percent or the risk-free rate plus 8).
• Range: the DCF is recalculated with the discount rate one point higher and lower and the starting growth three points lower and higher. The lowest and highest results form the range.

Method 2: sector multiples

ATLAS takes the median price-to-earnings ratio of the peers (limited to 6 to 35 times) and multiplies it by the company's earnings per share. It also takes the median EV/EBITDA (limited to 4 to 20 times) and applies it to the company's EBITDA, then subtracts net debt. EV/EBITDA is not used for banks and insurers. With both, the result is the geometric mean. At least three peers with usable ratios are needed. For loss-making companies without a usable earnings multiple, a price-to-sales multiple is used as a last resort and the confidence is capped at low.

A multiple is discarded when the company's own multiple is more than four times away from the peer median, because the comparison would say more about the peers than about the company.

Combining the two

• Both methods work: the fair value is the geometric mean of the DCF and the multiples value. If they are within 1.5 times of each other the range stays as the DCF range; if they differ more, the range runs from the lower to the higher value.
• The two differ by more than three times: ATLAS keeps only the one closer to the current price, marks the other as switched off and lowers the confidence.
• No usable DCF (for example free cash flow is not positive) or the company is a bank or insurer: the multiples value is used alone.

Which label you see

The gap between the price and the fair value is shown as "below fair value" when the price is at least 15 percent under the mid-point, "above fair value" when it is at least 15 percent over it, and "close to fair value" in between.

ATLAS does not show a fair value when the data is not reliable (for example inconsistent units or no share count) or when the estimate is more than three times or less than one third of the price. In those cases the model is telling us about its limits, not about the stock, so the page shows no fair value instead of an extreme number.

How the confidence level is built

Data sources

• Company financial statements: SEC filings for US-listed companies, stored provider financial statements for other markets.
• Exchange closing prices.
• Government bond yields (US Treasury via FRED, country rates where available).
• Analyst consensus growth estimates, where available.

Frequently asked questions

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