Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Syntel Inc (NASDAQ:SYNT) as an investment opportunity. 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 Syntel here.
What’s the value?
We are going to use a two-stage DCF 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. Firstly, I took the analyst consensus forecast of SYNT’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 10.21%. 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 $597.4M. Want to know how I calculated this value? Check out our detailed analysis here.
The graph above shows how SYNT’s top and bottom lines are expected to move in the future, which should give you an idea of SYNT’s outlook. Now we need to determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the steady 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 $1,461.5M.
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 $2,059.0M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $24.85, which, compared to the current share price of $21.91, we see that Syntel is about right, perhaps slightly undervalued at a 11.83% discount to what it is available for right now.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For SYNT, there are three important factors you should look at:
- 1. Financial Health: Does SYNT 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 SYNT’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 SYNT? 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.