Advertisement
U.S. markets close in 1 minute
  • S&P 500

    5,256.05
    +7.56 (+0.14%)
     
  • Dow 30

    39,806.98
    +46.90 (+0.12%)
     
  • Nasdaq

    16,384.26
    -15.27 (-0.09%)
     
  • Russell 2000

    2,121.45
    +7.11 (+0.34%)
     
  • Crude Oil

    83.00
    +1.65 (+2.03%)
     
  • Gold

    2,241.20
    +28.50 (+1.29%)
     
  • Silver

    24.98
    +0.23 (+0.92%)
     
  • EUR/USD

    1.0791
    -0.0039 (-0.36%)
     
  • 10-Yr Bond

    4.2060
    +0.0100 (+0.24%)
     
  • GBP/USD

    1.2622
    -0.0016 (-0.13%)
     
  • USD/JPY

    151.3870
    +0.1410 (+0.09%)
     
  • Bitcoin USD

    70,868.81
    +2,145.96 (+3.12%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.62
    +20.64 (+0.26%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Is Dycom Industries Inc (NYSE:DY) Expensive For A Reason? A Look At The Intrinsic Value

How far off is Dycom Industries Inc (NYSE:DY) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in August 2018 so be sure check out the updated calculation by following the link below.

View our latest analysis for Dycom Industries

Step by step through the calculation

I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To start off with we need to estimate the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow estimate

2019

2020

2021

2022

2023

Levered FCF ($, Millions)

$83.80

$80.60

$92.03

$105.07

$119.97

Source

Analyst x2

Analyst x3

Est @ 14.18%

Est @ 14.18%

Est @ 14.18%

Present Value Discounted @ 8.59%

$77.17

$68.35

$71.87

$75.57

$79.45

Present Value of 5-year Cash Flow (PVCF)= US$372.4m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.6%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$120.0m × (1 + 2.9%) ÷ (8.6% – 2.9%) = US$2.19b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$2.19b ÷ ( 1 + 8.6%)5 = US$1.45b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$1.82b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of $58.43. Compared to the current share price of $77.54, the stock is quite expensive and not available at a discount at this time.

NYSE:DY Intrinsic Value Export August 29th 18
NYSE:DY Intrinsic Value Export August 29th 18

The assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Dycom Industries as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.6%, which is based on a levered beta of 0.800. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For DY, I’ve compiled three pertinent factors you should look at:

  1. Financial Health: Does DY have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Future Earnings: How does DY’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of DY? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

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 past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.

Advertisement