An Intrinsic Value Calculation For Capital Senior Living Corporation (NYSE:CSU) Shows Investors Are Overpaying
Does the share price for Capital Senior Living Corporation (NYSE:CSU) 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 January 2018 then I highly recommend you check out the latest calculation for Capital Senior Living here.
Is CSU fairly valued?
I will be using the 2-stage growth 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 use the analyst consensus estimates of CSU’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 15%. 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 $113.1M. Want to know how I calculated this value? Check out our detailed analysis here.
The graph above shows how CSU’s earnings are expected to move in the future, which should give you some color on CSU’s outlook. Next, I calculate 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 $169.3M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $282.4M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $9.27, which, compared to the current share price of $11.79, we find that Capital Senior Living 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 CSU, I’ve compiled three pertinent aspects you should further research:
1. Financial Health: Does CSU 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 CSU’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 CSU? 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 NYSE 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.
