Estimating The Fair Value Of Computershare Limited (ASX:CPU)
How far off is Computershare Limited (ASX:CPU) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after February 2018 then I highly recommend you check out the latest calculation for Computershare here.
Crunching the numbers
I use what is known as the 2-stage model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin, I pulled together the analyst consensus estimates of CPU’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.55%. 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 $1,682.1M. Want to know how I arrived at this number? Take a look at our detailed analysis here.
In the visual above, we see how how CPU’s top and bottom lines are expected to move in the future, which should give you some color on CPU’s outlook. Then, 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 perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes $6,091.8M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $7,773.8M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of A$17.73, which, compared to the current share price of A$16.7, we find that Computershare is about right, perhaps slightly undervalued at a 5.82% discount to what it is available for right now.
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.
For CPU, there are three pertinent aspects you should further research:
1. Financial Health: Does CPU 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 CPU’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.
2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of CPU? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the ASX every 6 hours. If you want to find the calculation for other stocks 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.
