Dcf valuation

DCF Valuation Subskill

Performs discounted cash flow (DCF) valuation analysis to estimate intrinsic value per share. This subskill integrates with the deep-financial-research skill and uses the Financial Datasets MCP server for data.

🔗 Parent skill: ../../SKILL.md

When to Trigger

Activate For:

• "What is [ticker] worth?"
• "DCF valuation for [company]"
• "Intrinsic value of [stock]"
• "Fair value estimate"
• "Is [stock] undervalued/overvalued?"
• "Price target based on fundamentals"
• "Run a DCF on [ticker]"

Don't Trigger For:

• Simple price queries
• Technical analysis requests
• Comparable company analysis (use deep-financial-research instead)

Step 1: Gather Financial Data (via Financial Datasets MCP)

Request the following data using Financial Datasets MCP tools:

1.1 Cash Flow History

Request: Annual free cash flow for the last 5 years Extract: free_cash_flow for each year Fallback: Calculate as operating_cash_flow - capital_expenditure

1.2 Financial Metrics

Request: Current fundamentals snapshot Extract:

• market_cap
• enterprise_value
• pe_ratio
• debt_to_equity
• return_on_equity or return_on_invested_capital
• shares_outstanding

1.3 Balance Sheet

Request: Latest balance sheet Extract:

• total_debt (short-term + long-term)
• cash_and_equivalents
• total_assets

1.4 Current Price

Request: Real-time stock price Extract: price with timestamp

1.5 Company Facts

Request: Company profile Extract: sector, industry

Step 2: Calculate FCF Growth Rate

Calculate 5-Year FCF CAGR

CAGR = (Ending FCF / Beginning FCF)^(1/n) - 1

Growth Rate Selection Logic

FCF Pattern	Approach
Stable positive growth	Use CAGR with 10-20% haircut
Volatile/negative FCF	Use analyst estimates or industry avg
High growth (>20%)	Cap at 15% (sustained high growth is rare)

Cross-Validation

Compare with:

• Historical revenue growth
• Analyst EPS growth estimates
• Industry average growth rates

Step 3: Estimate Discount Rate (WACC)

Default Assumptions

Component	Base Value
Risk-free rate	4.0% (10Y Treasury)
Equity risk premium	5.5%
Cost of debt (pre-tax)	5.5%
Tax rate	25%

WACC Formula

WACC = (E/V × Re) + (D/V × Rd × (1-T))

Where:
- E = Market value of equity
- D = Market value of debt
- V = E + D (total value)
- Re = Cost of equity (Rf + β × ERP)
- Rd = Cost of debt
- T = Tax rate

Sector Adjustments

Sector	WACC Adjustment
Technology	+0.5% to +1.0% (higher risk)
Utilities	-0.5% to -1.0% (stable cash flows)
Healthcare	+0.0% to +0.5%
Financials	Use cost of equity only
Consumer Staples	-0.5% (defensive)
Energy	+1.0% to +1.5% (cyclical)
Industrials	+0.0% to +0.5%

Reasonableness Check

• WACC should be 2-4% below ROIC for value-creating companies
• Typical range: 7-12% for mature companies

Step 4: Project Future Cash Flows

Years 1-5 Projections

Apply growth rate with annual decay:

Year 1: FCF₀ × (1 + g)
Year 2: FCF₁ × (1 + g × 0.95)
Year 3: FCF₂ × (1 + g × 0.90)
Year 4: FCF₃ × (1 + g × 0.85)
Year 5: FCF₄ × (1 + g × 0.80)

Terminal Value (Gordon Growth Model)

Terminal Value = FCF₅ × (1 + g_terminal) / (WACC - g_terminal)

Where g_terminal = 2.5% (GDP growth proxy)

Step 5: Calculate Present Value

Discount Projected FCFs

PV(FCF) = FCF / (1 + WACC)^n

Calculate Enterprise Value

Enterprise Value = Σ PV(FCF Years 1-5) + PV(Terminal Value)

Calculate Equity Value

Equity Value = Enterprise Value - Net Debt
Net Debt = Total Debt - Cash

Calculate Fair Value Per Share

Fair Value Per Share = Equity Value / Shares Outstanding

Step 6: Sensitivity Analysis

Create 3×3 matrix varying:

• WACC: Base ±1%
• Terminal Growth: 2.0%, 2.5%, 3.0%

Example output:

                Terminal Growth
WACC        |   2.0%   |   2.5%   |   3.0%   |
------------|----------|----------|----------|
Base - 1%   |   $XXX   |   $XXX   |   $XXX   |
Base        |   $XXX   |   $XXX   |   $XXX   |
Base + 1%   |   $XXX   |   $XXX   |   $XXX   |

Step 7: Validate Results

Sanity Checks

1. EV Comparison

   • Calculated EV should be within 30% of reported enterprise_value
   • If off by >30%, revisit WACC or growth assumptions

2. Terminal Value Ratio

   • Terminal Value / Total EV should be 50-80% for mature companies
   • If >90%: growth rate may be too high
   • If <40%: near-term projections may be aggressive

3. P/FCF Cross-Check

   • Fair value should approximate FCF/share × 15-25 for mature companies

Step 8: Output Format

### DCF Valuation: [Company] ([TICKER])

#### Valuation Summary
| Metric | Value |
|--------|-------|
| **Current Price** | $XX.XX |
| **Fair Value** | $XX.XX |
| **Upside/(Downside)** | +XX.X% |
| **Verdict** | Undervalued / Fairly Valued / Overvalued |

#### Key Assumptions
| Input | Value | Source/Notes |
|-------|-------|--------------|
| Current FCF | $X.XXB | Financial Datasets (TTM) |
| FCF Growth Rate (5Y) | X.X% | Based on [CAGR/analyst estimates] |
| Terminal Growth | 2.5% | GDP growth proxy |
| WACC | X.X% | [Sector] adjustment applied |
| Shares Outstanding | X.XXB | Financial Datasets |
| Net Debt | $X.XXB | Debt - Cash |

#### Projected Free Cash Flows
| Year | FCF ($B) | Growth | PV ($B) |
|------|----------|--------|---------|
| Year 1 | $X.X | X.X% | $X.X |
| Year 2 | $X.X | X.X% | $X.X |
| Year 3 | $X.X | X.X% | $X.X |
| Year 4 | $X.X | X.X% | $X.X |
| Year 5 | $X.X | X.X% | $X.X |
| Terminal | $XX.X | 2.5% | $XX.X |

#### Sensitivity Analysis
| WACC \ Terminal | 2.0% | 2.5% | 3.0% |
|-----------------|------|------|------|
| [WACC-1%] | $XXX | $XXX | $XXX |
| [Base WACC] | $XXX | $XXX | $XXX |
| [WACC+1%] | $XXX | $XXX | $XXX |

#### Validation Checks
- ✅ Calculated EV within 30% of reported EV
- ✅ Terminal Value = XX% of Total EV (reasonable range)
- ✅ Implied P/FCF of XX.x (within 15-25 range)

#### Caveats
- DCF models are sensitive to input assumptions
- Growth rates may not be sustainable
- WACC estimates involve judgment
- Terminal value represents XX% of total value
- Does not account for [company-specific risks]

**Conclusion:** At $XX.XX, [TICKER] appears [undervalued/fairly valued/overvalued] relative to our DCF-derived fair value of $XX.XX. Key value drivers include [top 2-3 factors].

Integration with Deep Financial Research

This subskill can be called as part of the deep-financial-research workflow:

1. After gathering fundamentals and market data
2. Before presenting final investment thesis
3. Use DCF output to support valuation conclusion

Example Integration

After completing the company deep dive:
- "Now running DCF valuation to estimate intrinsic value..."
- [Execute DCF workflow]
- "Our DCF suggests [X%] upside/downside, supporting our [bullish/neutral/bearish] stance"

Example Interactions

User: "What's NVDA worth based on DCF?" → Execute full DCF workflow with Financial Datasets MCP

User: "Is Apple undervalued?" → Run DCF, compare fair value to current price

User: "Run a DCF on Microsoft as part of your analysis" → Execute DCF subskill within deep-financial-research workflow

User: "Show me the sensitivity analysis for Tesla's valuation" → Emphasize Step 6 (Sensitivity Analysis) in output

Caveats

• DCF is only as good as its assumptions
• High-growth companies are harder to value with DCF
• Cyclical companies require normalized FCF
• Financial companies need different approach (DDM or residual income)
• Always present DCF as one input among many, not definitive answer