U.S. Markets open in 9 hrs 17 mins

Is StarTek, Inc. (NYSE:SRT) Worth US$8.0 Based On Its Intrinsic Value?

Simply Wall St

Today we will run through one way of estimating the intrinsic value of StarTek, Inc. (NYSE:SRT) by taking the expected future cash flows and discounting them to today's value. I will be using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for StarTek

The calculation

We are going to use a two-stage DCF 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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
Levered FCF ($, Millions) US$10.8m US$13.6m US$15.8m US$17.6m US$19.0m US$20.3m US$21.3m US$22.2m US$22.9m US$23.6m
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ 15.51% Est @ 11.38% Est @ 8.49% Est @ 6.46% Est @ 5.05% Est @ 4.05% Est @ 3.36% Est @ 2.87%
Present Value ($, Millions) Discounted @ 9.2% US$9.9 US$11.4 US$12.1 US$12.4 US$12.3 US$12.0 US$11.5 US$11.0 US$10.4 US$9.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$112m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 10-year government bond rate of 1.7%. We discount the terminal cash flows to today's value at a cost of equity of 9.2%.

Terminal Value (TV)= FCF2029 × (1 + g) ÷ (r – g) = US$24m× (1 + 1.7%) ÷ 9.2%– 1.7%) = US$323m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$323m÷ ( 1 + 9.2%)10= US$134m

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$246m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$8.0, the company appears slightly overvalued at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

NYSE:SRT Intrinsic value, January 15th 2020

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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 StarTek 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 9.2%, which is based on a levered beta of 1.364. 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.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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?" 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. What is the reason for the share price to differ from the intrinsic value? For StarTek, There are three pertinent factors you should look at:

  1. Financial Health: Does SRT 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 SRT'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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of SRT? 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 updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.

  • Young trader’s epic Beyond Meat stock misfire: ‘Biggest mistake of my life’
    Business
    MarketWatch

    Young trader’s epic Beyond Meat stock misfire: ‘Biggest mistake of my life’

    For veteran Wall Street types, $12,000 is a rounding error, but for a guy getting his feet wet in the options pits, losing that much will leave a scar. Unfortunately, that's what happened this week to an anonymous trader whom we'll call “Juice,” if the sob story he shared on Reddit is accurate. “I thought I'd give options a try because I was doing pretty well swing trading and it was probably the biggest mistake of my life,” he wrote in a post.

  • I’m 38 with $315,000 saved for retirement, but have $30,000 in debt. Should I lower my 401(k) contributions to get rid of that debt?
    Business
    MarketWatch

    I’m 38 with $315,000 saved for retirement, but have $30,000 in debt. Should I lower my 401(k) contributions to get rid of that debt?

    Dear Catey, I currently have about $315,000 in retirement savings and am 38 years old. I have about $30,000 in consumer debt (this is the only debt we carry, no car payment or mortgage) — about $24,000 of which is an unsecured loan that I'm paying about 10% interest on; the rest is on credit cards that are on a 0% promotional period and that I hopefully pay off before the 0% period expires in October 2020. I'm trying to pay down my debt and continue to save aggressively for retirement…I've made minimal improvements over the past couple of years paying down my debt and continue to play the balance transfer game on credit cards to retain 0% interest rates or other low rate options.

  • ‘Taxpayers are leaving millions of dollars off their returns.’ Why Americans repeatedly overlook this lucrative tax credit
    Business
    MarketWatch

    ‘Taxpayers are leaving millions of dollars off their returns.’ Why Americans repeatedly overlook this lucrative tax credit

    Some 44% possibly eligible for the credit — by making less than $40,000 a year — were not aware of it, according to a new survey from the tax preparation company Jackson Hewitt. More than half of the same group either said they did not qualify (20%) or didn't know if they qualified (33%), according to the survey. The results reinforce past research on lagging claim rates for a program that was started 45 years ago.

  • Boeing's new 777X test aircraft taxis hard before first flight
    Business
    American City Business Journals

    Boeing's new 777X test aircraft taxis hard before first flight

    UPDATE: Boeing said Wednesday evening that the 777X first flight has been postponed until Friday because of bad weather. An Everett aviation enthusiast captured Boeing's 777X test aircraft taxiing hard down a Paine Field runway several times Wednesday prior to the widebody jet's first flight. Plane spotter Jennifer Schuld, a full-time nurse by profession and recreational airplane spotter, recorded the 777X taxi tests from a spot adjacent to a runway near the Boeing factory.

  • Business
    Benzinga

    8 Stocks To Buy With Dividend Yields Of At Least 9%

    Fortunately, there are plenty of stocks out there with generous dividend or distributions yields that analysts see as good investments as well. Here are eight stocks to buy with at least 9% yields, according to Bank of America. TCG is a business development company, a type of closed-end investment company that invests in small and mid-sized businesses.

  • Johnson & Johnson misses revenue estimates
    Business
    Reuters Videos

    Johnson & Johnson misses revenue estimates

    Johnson & Johnson on Wednesday posted a rare miss on revenue, marking the first time in at least eight quarters that the healthcare giant fell short on sales expectations. While sales did rise to $20.75 billion for the quarter, analysts were looking for $20.8 billion. But intense competition for key drugs like Zytiga, a prostate cancer drug, coupled with pressure on prescription drug prices in the U.S, have weighed on J&J's pharmaceuticals unit...

  • Beyond Meat Stock Falls On This Red Flag For Fake Meat
    Business
    Investor's Business Daily

    Beyond Meat Stock Falls On This Red Flag For Fake Meat

    Beyond Meat stock dropped Wednesday after news of slowing sales for top rival Impossible Foods raised fears of weaker demand for fake meat overall. Carrols Restaurant Group, which is the top U.S. franchisee of Burger King with over 1,000 locations, said Impossible Whopper sales have fallen to 28 per store per day from 32 previously, according to Bloomberg. While sales have stabilized, the Impossible Whopper has been added to the two-for-$6 discount menu temporarily vs. the suggested price of $5.59 per burger.

  • JPMorgan: 3 High-Yield Dividend Stocks to Snap Up Now
    Business
    TipRanks

    JPMorgan: 3 High-Yield Dividend Stocks to Snap Up Now

    It's not that they are necessarily incompatible – rather, it is just that the highest growth stocks tend to achieve their appreciation by plowing profits directly back into the company. The natural place to look is in sectors with high cash flows and essential products. Investment bank JPMorgan released a special report on the North American energy industry, emphasizing just these attributes – the rising production, the high cash flow, and the fundamental strength of the industry to survive a prolonged period of low prices.

  • How 5 of America's Richest Families Lost It All
    Business
    MoneyWise

    How 5 of America's Richest Families Lost It All

    Some of America's oldest family fortunes were built in the 1800s, during the nation's rocky but formative youth. The Rockefellers grew wealthy after John D. Rockefeller struck oil, and Levi Strauss got rich after inventing blue jeans as work pants for the Gold Rush days. Such losses -- which can happen in just one generation or stretch out over a century or longer -- are often driven by bad decisions, such as overspending and debt; investments that didn't pan out; and family infighting over the money.

  • How To Invest $100,000 (and Turn It Into $1 Million)
    Business
    SmartAsset

    How To Invest $100,000 (and Turn It Into $1 Million)

    As you invest for retirement, becoming a millionaire might be a reasonable goal. Yes, millionaire status is no longer rarefied air, and depending on your income needs, having at least $1 million in the bank might be necessary to last you through retirement. If you're interested in reaching millionaire status as an investor, here's what you need to know to pull it off.

  • Dow Jones Futures: After Stock Market Pause, These 5 Top Stocks Move On News
    Business
    Investor's Business Daily

    Dow Jones Futures: After Stock Market Pause, These 5 Top Stocks Move On News

    Dow Jones futures edged lower Wednesday, along with S&P 500 futures and Nasdaq futures, after the stock market rally largely erased intraday gains. Texas Instruments, Teradyne and Citrix Systems reported earnings, while PayPal reached a key China payments deal. Paycom stock will join the S&P 500 index.

  • Head of U.S.’ largest bank says central banks are fueling a sovereign debt bubble, negative-rates won’t ‘end well’
    Business
    MarketWatch

    Head of U.S.’ largest bank says central banks are fueling a sovereign debt bubble, negative-rates won’t ‘end well’

    Jamie Dimon doesn't have much positive to say about negative interest rates in Europe and Japan or public policy in the United States during the past decade. The JPMorgan Chase & Co. (JPM) Chairman and CEO blasted the policy of negative interest rates adopted in Europe and Japan during an interview Wednesday with CNBC, while arguing that economic growth in the U.S. could have been nearly double its actual rate if the government policy had been better. Dimon took aim at fiscal and other economic policies in place at the U.S. federal level.

  • Bernie Sanders Reacts to Hillary Clinton's Comments Saying 'Nobody Likes Him'
    Politics
    Meredith Videos

    Bernie Sanders Reacts to Hillary Clinton's Comments Saying 'Nobody Likes Him'

    Hillary Clinton says “nobody likes” her former presidential rival Bernie Sanders, even as the Vermont senator remains entrenched among the front-runners in the Democratic race

  • Tesla Stock Surge Continues With Fourth-Quarter Earnings Coming Up
    Business
    Investor's Business Daily

    Tesla Stock Surge Continues With Fourth-Quarter Earnings Coming Up

    Tesla stock shot up to a record high Wednesday as the electric-car company reached a market valuation above $100 billion for the first time and gets set to report fourth-quarter earnings next week. Tesla overtook Volkswagen as the second most valuable auto company. The market cap of Tesla, at about $102.5 billion, is above General Motors and Ford Motor combined.

  • AT&T Finds a New Way to Help Grind Down Its Debt Mountain
    Business
    Bloomberg

    AT&T Finds a New Way to Help Grind Down Its Debt Mountain

    While that's a higher interest rate than nearly any loan AT&T could have received, the one significant advantage is that the $6 billion doesn't add to its $165 billion debt pile. This is a bit of a surprise for a high-grade-debt company like AT&T,” said Dave Novosel, an analyst with Gimme Credit. AT&T representatives declined to comment on the tower-receivables entity, citing a quiet period ahead of its earnings report later this month.

  • Business
    Barrons.com

    Hess and 5 More Energy Stocks That Could Cut Their Dividends, According to an Analyst

    Meyer is particularly concerned about companies that produce a lot of natural gas because the price has been falling and could continue to drop. Meyer identified two stocks— (HES) and (ARX)—that she says have a “a sizable risk of cutting their dividends over the next 1-2 years. Hess (HES) has a dividend payout ratio of 362% of expected 2020 profits, according to Meyer, meaning the company is planning to pay out far more cash to investors than it is earning.

  • Business
    Benzinga

    Costco CEO Talks Special Dividend, Membership Fees In CNBC Interview

    Costco Wholesale Corporation (NASDAQ: COST) CEO Craig Jelinek told Jim Cramer in an interview aired Tuesday how the company is able to both offer consumers low prices and pay employees a higher than average wage. Costco offers consumers "great prices" because of its unique business model, Jelinek said. The company's stores are specifically designed to keep overhead costs as low as possible.

  • Business
    Barrons.com

    IBM Stock Rose More Today Than in the Last 10 Years. It’s Time For A Shake-Up.

    For the year to date, IBM shares have rallied a solid 7.4%. Steve Milunovich, tech strategist at Wolfe Research, took a look at IBM shares (ticker: IBM) in a research note Wednesday morning and advised investors to put the fourth-quarter performance into perspective. The divergence says more about Microsoft than it does about IBM, Milunovich said in an interview Wednesday.

  • Is It Time to Buy These 3 Beaten-Down Stocks? Analysts Say Yes
    Business
    TipRanks

    Is It Time to Buy These 3 Beaten-Down Stocks? Analysts Say Yes

    The term 'buy when there's blood in the streets' was coined in the 18th century by Baron Rothchild. While some investors automatically avoid underperforming names, the ones willing to take the risk can often receive handsome reward once the company at question executes a turnaround. With this in mind, We'll open up the TipRanks database and take a look at three beaten down stock which those in the know think are ripe for a trend reversal.

  • What Kind Of Shareholder Owns Most Nokia Corporation (HEL:NOKIA) Stock?
    Business
    Simply Wall St.

    What Kind Of Shareholder Owns Most Nokia Corporation (HEL:NOKIA) Stock?

    The big shareholder groups in Nokia Corporation (HEL:NOKIA) have power over the company. Institutions will often hold stock in bigger companies, and we expect to see insiders owning a noticeable percentage of the smaller ones. Companies that have been privatized tend to have low insider ownership.

  • Is Exxon Stock A Buy Right Now? Here's What Earnings, Stock Chart Show
    Business
    Investor's Business Daily

    Is Exxon Stock A Buy Right Now? Here's What Earnings, Stock Chart Show

    Exxon Mobil stock has been trending lower since last spring, but the Dow Jones oil major is pushing ahead with big shale investments and seeing production surge from the Permian Basin. Is Exxon stock a good buy? Take a look at Exxon earnings and the XOM stock chart.

  • These 10 Rules Made Warren Buffett a Billionaire
    Business
    MoneyWise

    These 10 Rules Made Warren Buffett a Billionaire

    Warren Buffett may be worth tens of billions, but he still lives simply, and his strategies for smart investing and amassing wealth aren't too complicated either. Buffett's first key to prosperity has little to do with picking stocks. "Without good communication skills, you won't be able to convince people to follow you even though you see over the mountain and they don't," Buffett once told a Stanford MBA student.

  • New FDA documents shed light on agency's rejection of Sarepta drug
    Business
    American City Business Journals

    New FDA documents shed light on agency's rejection of Sarepta drug

    Patient deaths, testing concerns and “weak arguments.” Those are just a few of the issues the FDA had with Sarepta Therapeutics's recent drug application, according to new documents released this week. The FDA offered a rare peek at its decision-making process Wednesday, releasing documents related to its initial rejection and later approval of Sarepta's (Nasdaq: SRPT) rare disease drug Vyondys 53. Sarepta CEO Doug Ingram previously declined to release the rejection letter.

  • Intel’s volatile forecast, Comcast’s changing cycle and airlines’ Boeing drama take earnings stage
    Business
    MarketWatch

    Intel’s volatile forecast, Comcast’s changing cycle and airlines’ Boeing drama take earnings stage

    Intel (INTC) investors suffered a choppy ride last year, after the chip maker set its forecast at the start of 2019, lowered it three months later, then brought it back up again toward the end of the year amid production challenges, a leadership transition and resurgent competition from Advanced Micro Devices Inc. AMD) That amount of drama is not normal for a chip maker long seen as untouchable by rivals and consistently successful to a level of almost being boring.

  • The stock market is on steroids and it could end up like the dot com bubble: top money manager
    Business
    Yahoo Finance

    The stock market is on steroids and it could end up like the dot com bubble: top money manager

    Skybridge Capital co-CIO Troy Gayeski makes a hell of a lot of sense to this journalist pounding the pavement in Davos at the World Economic Forum. It's because Gayeski's (who is an upbeat guy by nature based on our interactions in the past) take on the markets is rationale and appears to be where we are headed thanks to a helping hand of interest rate cuts from the Federal Reserve. Gayeski is quick to point out that the Fed slashed interest rates three times and expanded its balance sheet in 1998.