Is InterContinental Hotels Group PLC (LON:IHG) Worth £46.06 Based On Its Intrinsic Value?
How far off is InterContinental Hotels Group PLC (LSE:IHG) 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. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after December 2017 then I highly recommend you check out the latest calculation for InterContinental Hotels Group 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 IHG’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.3%. This resulted in a present value of 5-year cash flow of $2,076.9M. Keen to know how I calculated this value? Read our detailed analysis here.
In the visual above, we see how how IHG’s top and bottom lines are expected to move going forward, which should give you some color on IHG’s outlook. Next, I determine the terminal value, which accounts for all the future cash flows after the five years. 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. Discounting the terminal value back five years gives us a present value of $6,848.1M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $8,925.0M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of £35.49, which, compared to the current share price of £46.06, we find that InterContinental Hotels Group is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For IHG, I’ve put together three essential factors you should further examine:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the LSE 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.
