Estimating The Intrinsic Value Of Hollywood Bowl Group plc (LON:BOWL)
Does the share price for Hollywood Bowl Group plc (LSE:BOWL) 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. If you are reading this after May 2018 then I highly recommend you check out the latest calculation for Hollywood Bowl Group here.
Is BOWL fairly valued?
I will be using the 2-stage growth 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 took the analyst consensus estimates of BOWL’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.3%. This resulted in a present value of 5-year cash flow of UK£80.53M. Keen to know how I calculated this value? Check out our detailed analysis here.
The infographic above illustrates how BOWL’s earnings are expected to move going forward, which should give you an idea of BOWL’s outlook. Now we need to calculate 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. Discounting the terminal value back five years gives us a present value of UK£233.16M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is UK£313.69M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of £2.09, which, compared to the current share price of £2.13, we see that Hollywood Bowl Group is fair value, maybe slightly overvalued at the time of writing.
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 BOWL, I’ve put together three relevant factors you should further examine:
Financial Health: Does BOWL 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 BOWL’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 BOWL? 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 GB 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.
