Is There An Opportunity With Harte Hanks, Inc.'s (NASDAQ:HHS) 31% Undervaluation?
Key Insights
The projected fair value for Harte Hanks is US$11.07 based on 2 Stage Free Cash Flow to Equity
Harte Hanks is estimated to be 31% undervalued based on current share price of US$7.65
Industry average discount to fair value of 27% suggests Harte Hanks' peers are currently trading at a lower discount
Does the March share price for Harte Hanks, Inc. (NASDAQ:HHS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Check out our latest analysis for Harte Hanks
What's The Estimated Valuation?
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$1.90m | US$6.20m | US$5.22m | US$4.68m | US$4.38m | US$4.21m | US$4.12m | US$4.09m | US$4.10m | US$4.13m |
Growth Rate Estimate Source | Analyst x1 | Analyst x1 | Est @ -15.74% | Est @ -10.33% | Est @ -6.54% | Est @ -3.89% | Est @ -2.04% | Est @ -0.74% | Est @ 0.17% | Est @ 0.81% |
Present Value ($, Millions) Discounted @ 6.8% | US$1.8 | US$5.4 | US$4.3 | US$3.6 | US$3.2 | US$2.8 | US$2.6 | US$2.4 | US$2.3 | US$2.1 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$31m
The second stage is also known as Terminal Value, this is the business's cash flow after 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 (2.3%) 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 6.8%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$4.1m× (1 + 2.3%) ÷ (6.8%– 2.3%) = US$95m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$95m÷ ( 1 + 6.8%)10= US$49m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$80m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$7.7, the company appears quite good value at a 31% 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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Harte Hanks 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 6.8%, which is based on a levered beta of 0.970. 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.
Moving On:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Harte Hanks, we've compiled three essential factors you should look at:
Risks: As an example, we've found 2 warning signs for Harte Hanks (1 is concerning!) that you need to consider before investing here.
Future Earnings: How does HHS'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: Do you like a good all-rounder? 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 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.
