An Intrinsic Value Calculation For TAL Education Group (NYSE:TAL) Shows Investors Are Overpaying
I am going to run you through how I calculated the intrinsic value of TAL Education Group (NYSE:TAL) using the discounted cash flow (DCF) method. 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. Also note that this article was written in December 2017 so be sure check the latest calculation for TAL Education Group here.
Crunching the numbers
I’ve used 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. Firstly, I use the analyst consensus estimates of TAL’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 9.77%. This resulted in a present value of 5-year cash flow of $2,270.2M. Want to know how I calculated this value? Take a look at our detailed analysis here.
Above is a visual representation of how TAL’s earnings are expected to move going forward, which should give you some color on TAL’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate 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. After discounting the terminal value back five years, the present value becomes $7,633.7M.
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 $9,903.9M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $19.77, which, compared to the current share price of $29.34, we see that TAL Education Group is rather overvalued at the time of writing.
Next Steps:
Whilst important, DCF calculation 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 TAL, there are three fundamental aspects you should further examine:
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.
