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Estimating The Intrinsic Value Of Royal Gold Inc (NASDAQ:RGLD)

Michael Crabtree

Does the share price for Royal Gold Inc (NASDAQ:RGLD) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. I will use 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 September 2018 so be sure check out the updated calculation by following the link below.

See our latest analysis for Royal Gold

The calculation

I’m using the 2-stage growth 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. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

2019 2020 2021 2022 2023
Levered FCF ($, Millions) $306.85 $326.98 $324.00 $374.86 $433.71
Source Analyst x6 Analyst x5 Analyst x1 Est @ 15.7% Est @ 15.7%
Present Value Discounted @ 10.06% $278.79 $269.91 $243.00 $255.43 $268.51

Present Value of 5-year Cash Flow (PVCF)= US$1.32b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. 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 10.1%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$433.7m × (1 + 2.9%) ÷ (10.1% – 2.9%) = US$6.28b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$6.28b ÷ ( 1 + 10.1%)5 = US$3.89b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$5.20b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $79.4. Compared to the current share price of $77.83, the stock is about right, perhaps slightly undervalued at a 2.0% discount to what it is available for right now.

NasdaqGS:RGLD Intrinsic Value Export September 19th 18

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Royal Gold 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 10.1%, which is based on a levered beta of 1.009. 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:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For RGLD, there are three key aspects you should further examine:

  1. Financial Health: Does RGLD 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 RGLD’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 RGLD? 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 NASDAQ every 6 hours. If you want to find the calculation for other stocks 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.