Estimating The Fair Value Of Eldorado Resorts Inc (NASDAQ:ERI)
Does the share price for Eldorado Resorts Inc (NASDAQ:ERI) 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 April 2018 so be sure check the latest calculation for Eldorado Resorts here.
What’s the value?
I use what is known as the 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I pulled together the analyst consensus forecast of ERI’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 14.08%. 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 US$980.11M. Keen to know how I calculated this value? Take a look at our detailed analysis here.
The infographic above illustrates how ERI’s top and bottom lines are expected to move in the future, which should give you some color on ERI’s outlook. Next, I determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided 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 US$1.81B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$2.79B. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $36.14, which, compared to the current share price of $35.7, we see that Eldorado Resorts is about right, perhaps slightly undervalued at a 1.21% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For ERI, I’ve compiled three fundamental factors you should further research:
Financial Health: Does ERI 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.
Future Earnings: How does ERI’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ERI? 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 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.
