dcf-valuation

name	dcf-valuation
description	Performs discounted cash flow (DCF) valuation to estimate intrinsic value per share. Uses Financial Datasets MCP for fundamentals. Triggers when user asks for fair value, intrinsic value, DCF, valuation, "what is X worth", undervalued/overvalued, or price target analysis.
license	Complete terms in LICENSE.txt

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