A Look At The Intrinsic Value Of ACI Worldwide Inc (NASDAQ:ACIW)
I am going to run you through how I calculated the intrinsic value of ACI Worldwide Inc (NASDAQ:ACIW) by taking the expected future cash flows and discounting them to their present value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. View out our latest analysis for ACI Worldwide
The method
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.
5-year cash flow forecast
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF ($, Millions) | $142.46 | $155.82 | $172.40 | $212.20 | $243.70 |
Source | Analyst x4 | Analyst x4 | Analyst x1 | Analyst x1 | Analyst x1 |
Present Value Discounted @ 10.63% | $128.77 | $127.31 | $127.32 | $141.65 | $147.04 |
Present Value of 5-year Cash Flow (PVCF)= US$672.08m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 10.6%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$243.70m × (1 + 2.9%) ÷ (10.6% – 2.9%) = US$3.27b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$3.27b ÷ ( 1 + 10.6%)5 = US$1.97b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$2.64b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $22.7. Compared to the current share price of $26.01, the stock is fair value, maybe slightly overvalued at the time of writing.
The assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at ACI Worldwide as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 10.6%, which is based on a levered beta of 1.09. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
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 ACIW, I’ve compiled three key factors you should further examine:
Financial Health: Does ACIW 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 ACIW’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 ACIW? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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.
