Let me tell you about the day I fell in love with the Discounted Cash Flows approach to valuation.
It was late 2013, my very last semester at uni and I had to analyse a company for the final assignment. I picked GrainCorp, one of Australia’s largest bulk grain handlers. I picked it because I’d developed an interest in cooperatives and GrainCorp was originally founded as one.
I’d learned about the discounted cash flows approach in my job at the time so I ran it over GrainCorp. I read all the financial statements and operations reports and put in the assumptions as best as I knew how.
The base case said GrainCorp was worth about $4 per share but it was trading at $6, so I placed a sell recommendation on it in my assignment. I didn’t know why, but I felt the security was overpriced somehow and walked away thinking I’d probably messed the calculation up.
Not one month later, the treasurer at the time, Joe Hockey cancelled the takeover by American agri-Titan, Archer Daniels Midland. The share price dropped almost exactly $2 (I.e. reversing out the premium it had priced in for the by then canned merger) and I ended up crushing that assessment and picking up a High Distinction that semester.
That’s the day I fell in love with Discounted Cash Flows.