U.S. markets closed
  • S&P 500

    4,432.99
    -40.76 (-0.91%)
     
  • Dow 30

    34,584.88
    -166.42 (-0.48%)
     
  • Nasdaq

    15,043.97
    -137.93 (-0.91%)
     
  • Russell 2000

    2,236.87
    +3.96 (+0.18%)
     
  • Crude Oil

    71.96
    -0.01 (-0.01%)
     
  • Gold

    1,753.90
    +2.50 (+0.14%)
     
  • Silver

    22.42
    +0.13 (+0.58%)
     
  • EUR/USD

    1.1734
    -0.0037 (-0.32%)
     
  • 10-Yr Bond

    1.3700
    +0.0390 (+2.93%)
     
  • GBP/USD

    1.3734
    -0.0063 (-0.45%)
     
  • USD/JPY

    109.9200
    +0.2020 (+0.18%)
     
  • BTC-USD

    47,604.84
    -402.58 (-0.84%)
     
  • CMC Crypto 200

    1,193.48
    -32.05 (-2.61%)
     
  • FTSE 100

    6,963.64
    -63.84 (-0.91%)
     
  • Nikkei 225

    30,500.05
    +176.75 (+0.58%)
     

An Intrinsic Calculation For Cimpress plc (NASDAQ:CMPR) Suggests It's 47% Undervalued

  • Oops!
    Something went wrong.
    Please try again later.
·6 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Cimpress plc (NASDAQ:CMPR) as an investment opportunity by taking the foreast future cash flows of the company and discounting them back to today's value. I will be using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Cimpress

The model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

Levered FCF ($, Millions)

US$216.4m

US$209.7m

US$278.4m

US$278.6m

US$282.7m

US$286.8m

US$291.3m

US$295.9m

US$300.8m

US$305.8m

Growth Rate Estimate Source

Analyst x1

Analyst x1

Analyst x1

Analyst x1

Analyst x1

Est @ 1.46%

Est @ 1.54%

Est @ 1.6%

Est @ 1.64%

Est @ 1.67%

Present Value ($, Millions) Discounted @ 9.8%

US$197

US$174

US$210

US$192

US$177

US$164

US$151

US$140

US$129

US$120

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.7b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 1.7%. We discount the terminal cash flows to today's value at a cost of equity of 9.8%.

Terminal Value (TV)= FCF2029 × (1 + g) ÷ (r – g) = US$306m× (1 + 1.7%) ÷ 9.8%– 1.7%) = US$3.9b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$3.9b÷ ( 1 + 9.8%)10= US$1.5b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$3.2b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$64.3, the company appears quite good value at a 47% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

NasdaqGS:CMPR Intrinsic value April 12th 2020
NasdaqGS:CMPR Intrinsic value April 12th 2020

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 these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Cimpress as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 9.8%, which is based on a levered beta of 1.241. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. What is the reason for the share price to differ from the intrinsic value? For Cimpress, We've compiled three important factors you should look at:

  1. Risks: For example, we've discovered 3 warning signs for Cimpress (1 shouldn't be ignored!) that you should be aware of before investing here.

  2. Future Earnings: How does CMPR'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: Do you like a good all-rounder? 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 updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.