U.S. Markets closed
  • S&P 500

    4,297.14
    +16.99 (+0.40%)
     
  • Dow 30

    33,912.44
    +151.39 (+0.45%)
     
  • Nasdaq

    13,128.05
    +80.87 (+0.62%)
     
  • Russell 2000

    2,021.35
    +4.73 (+0.23%)
     
  • Crude Oil

    88.15
    -1.26 (-1.41%)
     
  • Gold

    1,777.10
    -4.30 (-0.24%)
     
  • Silver

    20.18
    -0.09 (-0.43%)
     
  • EUR/USD

    1.0164
    -0.0001 (-0.0102%)
     
  • 10-Yr Bond

    2.7910
    -0.0580 (-2.04%)
     
  • Vix

    19.95
    +0.42 (+2.15%)
     
  • GBP/USD

    1.2056
    -0.0002 (-0.0193%)
     
  • USD/JPY

    133.0880
    -0.1840 (-0.1381%)
     
  • BTC-USD

    24,143.94
    -163.51 (-0.67%)
     
  • CMC Crypto 200

    571.41
    -19.35 (-3.28%)
     
  • FTSE 100

    7,509.15
    +8.26 (+0.11%)
     
  • Nikkei 225

    28,871.78
    +324.80 (+1.14%)
     

Royal Gold, Inc. (NASDAQ:RGLD) Shares Could Be 26% Below Their Intrinsic Value Estimate

  • Oops!
    Something went wrong.
    Please try again later.
·5 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Today we will run through one way of estimating the intrinsic value of Royal Gold, Inc. (NASDAQ:RGLD) 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!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. 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.

See our latest analysis for Royal Gold

The calculation

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. 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Levered FCF ($, Millions)

US$181.1m

US$426.2m

US$484.0m

US$493.3m

US$502.7m

US$512.4m

US$522.2m

US$532.2m

US$542.5m

US$552.9m

Growth Rate Estimate Source

Analyst x2

Analyst x1

Analyst x1

Est @ 1.92%

Est @ 1.92%

Est @ 1.92%

Est @ 1.92%

Est @ 1.92%

Est @ 1.92%

Est @ 1.92%

Present Value ($, Millions) Discounted @ 6.5%

US$170

US$376

US$401

US$383

US$367

US$351

US$336

US$321

US$307

US$294

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$3.3b

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 (1.9%) 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 6.5%.

Terminal Value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US$553m× (1 + 1.9%) ÷ (6.5%– 1.9%) = US$12b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$12b÷ ( 1 + 6.5%)10= US$6.5b

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$9.8b. 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$110, the company appears a touch undervalued at a 26% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

dcf
dcf

The assumptions

Now 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 Royal Gold 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 6.5%, which is based on a levered beta of 1.083. 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.

Looking Ahead:

Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For Royal Gold, there are three fundamental items you should further examine:

  1. Financial Health: Does RGLD 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.

  2. Future Earnings: How does RGLD'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.

  3. 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!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.