Calculating The Intrinsic Value Of The KEYW Holding Corporation (KEYW)
Does the share price for The KEYW Holding Corporation (NASDAQ:KEYW) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in November 2017 so be sure check the latest calculation for KEYW Holding here.
Is KEYW fairly valued?
I use what is known as the 2-stage model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To start off, I use the analyst consensus estimates of KEYW’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 13.33%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $82M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how KEYW’s earnings are expected to move going forward, which should give you an idea of KEYW’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is $173M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $255M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $5.18, which, compared to the current share price of $5.25, we find that KEYW Holding is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For KEYW, there are three important aspects you should further examine:
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.
