A Look At The Intrinsic Value Of Canterbury Park Holding Corporation (NASDAQ:CPHC)
Key Insights
Canterbury Park Holding's estimated fair value is US$21.74 based on 2 Stage Free Cash Flow to Equity
With US$19.96 share price, Canterbury Park Holding appears to be trading close to its estimated fair value
Canterbury Park Holding's peers seem to be trading at a higher discount to fair value based onthe industry average of 19%
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Canterbury Park Holding Corporation (NASDAQ:CPHC) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for Canterbury Park Holding
Crunching The Numbers
We're using 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 a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$6.30m | US$6.12m | US$6.04m | US$6.03m | US$6.05m | US$6.11m | US$6.19m | US$6.29m | US$6.40m | US$6.52m |
Growth Rate Estimate Source | Est @ -4.89% | Est @ -2.78% | Est @ -1.30% | Est @ -0.26% | Est @ 0.46% | Est @ 0.97% | Est @ 1.32% | Est @ 1.57% | Est @ 1.74% | Est @ 1.87% |
Present Value ($, Millions) Discounted @ 7.3% | US$5.9 | US$5.3 | US$4.9 | US$4.6 | US$4.3 | US$4.0 | US$3.8 | US$3.6 | US$3.4 | US$3.2 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$43m
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. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 7.3%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$6.5m× (1 + 2.2%) ÷ (7.3%– 2.2%) = US$130m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$130m÷ ( 1 + 7.3%)10= US$64m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$107m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$20.0, the company appears about fair value at a 8.2% 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.
The Assumptions
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Canterbury Park Holding 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 7.3%, which is based on a levered beta of 1.025. 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 Canterbury Park Holding
Strength
Currently debt free.
Dividends are covered by earnings and cash flows.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Hospitality market.
Opportunity
Current share price is below our estimate of fair value.
Lack of analyst coverage makes it difficult to determine CPHC's earnings prospects.
Threat
No apparent threats visible for CPHC.
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. 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. For Canterbury Park Holding, we've compiled three additional items you should further research:
Risks: Case in point, we've spotted 2 warning signs for Canterbury Park Holding you should be aware of.
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!
Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGM every day. If you want to find the calculation for other stocks 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.
