Investors Are Undervaluing Civeo Corporation (CVEO) By 23.38%, Here Is My Intrinsic Value Calculation
In this article I am going to calculate the intrinsic value of Civeo Corporation (NYSE:CVEO) using the discounted cash flows (DCF) model. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in October 2017 so be sure check the latest calculation for Civeo here.
What’s the value?
I will be using the 2-stage growth 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, I took the analyst consensus forecast of CVEO’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 13.64%. 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 $157M. Want to understand how I calculated this value? Take a look at our detailed analysis here.
The infographic above illustrates how CVEO’s earnings are expected to move in the future, which should give you an idea of CVEO’s outlook. Next, I calculate 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 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 $182M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $338M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $2.56, which, compared to the current share price of $1.96, we see that Civeo is about right, perhaps slightly undervalued at a 23.38% discount to what it is available for right now.
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. What is the reason for the share price to differ from the intrinsic value? For CVEO, I’ve compiled three relevant factors you should look at:
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.
