A Look At The Fair Value Of InterContinental Hotels Group PLC (LON:IHG)
I am going to run you through how I calculated the intrinsic value of InterContinental Hotels Group PLC (LSE:IHG) 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 May 2018 then I highly recommend you check out the latest calculation for InterContinental Hotels Group here.
What’s the value?
I use what is known as the 2-stage 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 pulled together the analyst consensus estimates of IHG’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.3%. This resulted in a present value of 5-year cash flow of US$2.57B. Keen to know how I arrived at this number? Read our detailed analysis here.
In the visual above, we see how how IHG’s top and bottom lines are expected to move in the future, which should give you an idea of IHG’s outlook. Now we need to calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual 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 US$8.03B.
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 US$10.59B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of £41.65, which, compared to the current share price of £47.68, we find that InterContinental Hotels Group 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.
For IHG, I’ve compiled three pertinent aspects you should further research:
Financial Health: Does IHG 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.
Future Earnings: How does IHG’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of IHG? 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 LSE 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.
