Are Investors Undervaluing Bloomsbury Publishing Plc (LON:BMY) By 35%?

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Bloomsbury Publishing fair value estimate is UK£7.25

• Bloomsbury Publishing is estimated to be 35% undervalued based on current share price of UK£4.69

• Industry average discount to fair value of 42% suggests Bloomsbury Publishing's peers are currently trading at a higher discount

Does the December share price for Bloomsbury Publishing Plc (LON:BMY) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. It may sound complicated, but actually it is quite simple!

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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 Bloomsbury Publishing

Crunching The Numbers

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (£, Millions)	UK£23.9m	UK£28.5m	UK£30.1m	UK£31.3m	UK£32.3m	UK£33.2m	UK£34.0m	UK£34.7m	UK£35.4m	UK£36.0m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Analyst x1	Est @ 3.97%	Est @ 3.24%	Est @ 2.72%	Est @ 2.36%	Est @ 2.11%	Est @ 1.93%	Est @ 1.81%
Present Value (£, Millions) Discounted @ 6.7%	UK£22.4	UK£25.1	UK£24.8	UK£24.2	UK£23.4	UK£22.5	UK£21.6	UK£20.7	UK£19.8	UK£18.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£223m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = UK£36m× (1 + 1.5%) ÷ (6.7%– 1.5%) = UK£712m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£712m÷ ( 1 + 6.7%)¹⁰= UK£374m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£597m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of UK£4.7, the company appears quite good value at a 35% 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.

LSE:BMY Discounted Cash Flow December 19th 2023

Important 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 Bloomsbury Publishing 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 6.7%, which is based on a levered beta of 0.869. 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.

SWOT Analysis for Bloomsbury Publishing

Strength

• Earnings growth over the past year exceeded the industry.

• Currently debt free.

• Dividends are covered by earnings and cash flows.

Weakness

• Earnings growth over the past year is below its 5-year average.

• Dividend is low compared to the top 25% of dividend payers in the Media market.

Opportunity

• Trading below our estimate of fair value by more than 20%.

Threat

• No apparent threats visible for BMY.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. 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 sitting below the intrinsic value? For Bloomsbury Publishing, we've compiled three important factors you should further examine:

1. Risks: For example, we've discovered 2 warning signs for Bloomsbury Publishing (1 shouldn't be ignored!) that you should be aware of before investing here.

2. Future Earnings: How does BMY'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every British stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.