In this article, we’re going to estimate the intrinsic value of Camping World Holdings, Inc. (NYSE:CWH) by taking the company’s projected future cash flows and discounting them to today’s value. One way to achieve this is by using the discounted cash flow (DCF) model. Don’t be put off by the jargon, the math behind it is actually quite simple.
We generally believe that a company’s value is the present value of all the cash it will generate in the future. However, a DCF is just one evaluation metric among many, and it is not without its shortcomings. If you still have burning questions about this type of assessment, take a look at Simply Wall St’s analytics model.
Check out our latest analysis for Camping World Holdings
crunching the numbers
We use the 2-phase growth model, which simply means that we consider two phases of company growth. In the initial phase, the company may have a higher growth rate and in the second phase, a stable growth rate is usually expected. First, we need to estimate cash flows over the next ten years. Where possible we use analyst estimates, but when these are not available we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We expect companies with declining free cash flow to slow their rate of contraction and companies with growing free cash flow to slow their growth rate over this period. We do this to take into account that growth tends to slow down more in the early years than in later years.
A DCF is all about the idea that a dollar in the future is worth less than a dollar today, so let’s discount the value of those future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) forecast.
|Leveraged FCF ($, million)||$446.2 million||$354.7 million||$313.9 million||$290.4 million||$276.8 million||$269.4 million||$265.9 million||$265.0 million||$265.9 million||$268.1 million|
|Source of growth rate estimate||Analyst x3||Analyst x3||Estimated @ -11.51%||Estimated @ -7.48%||Estimated @ -4.66%||Estimated @ -2.69%||Estimated @ -1.31%||Estimated @ -0.34%||Estimated @ 0.34%||Estimated @ 0.81%|
|Present Value ($, millions) Discounted @ 9.7%||$407||$295||$238||$201||$174||$155||$139||$126||$116||$106|
(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = $2.0 billion
The second stage is also known as the terminal value, this is the company’s cash flow after 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 10-year government bond yield of 1.9%. We discount the final cash flows to today’s value using a cost of equity rate of 9.7%.
final value (TV)= FCF2031 × (1 + g) ÷ (r – g) = $268 million × (1 + 1.9%) ÷ (9.7% – 1.9%) = $3.5 billion
Present value of terminal value (PVTV)= TV / (1 + r)10= $3.5 billion ÷ (1 + 9.7%)10= $1.4 billion
The total value is the sum of the cash flows for the next ten years plus the discounted future value, giving the total equity value, which in this case is $3.4 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Compared to the current share price of $25.8, the company appears fairly undervalued at a discount of 35% to the current share price. However, ratings are inaccurate instruments, more like a telescope – move a few degrees and end up in another galaxy. Remember.
The above calculation depends heavily on two assumptions. The first is the discount rate and the other is the cash flows. You do not have to agree with these inputs, I recommend repeating and playing with the calculations yourself. The DCF also does not take into account the potential cyclicality of an industry or a company’s future capital needs, so it does not provide a complete picture of a company’s potential performance. Since we view Camping World Holdings as a potential shareholder, the discount rate used is the cost of equity rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for the debt. In this calculation we used 9.7% which is based on a leveraged beta of 1.832. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the industry average of global peers with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable business.
While a company’s valuation is important, ideally it isn’t the only analysis you review for a company. It is not possible to get a foolproof rating with a DCF model. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under/overvalued.” For example, slightly adjusting the growth rate of the terminal value can dramatically change the overall result. Why is the intrinsic value higher than the current share price? For Camping World Holdings there are three key elements to look out for:
- risks: Take risks, for example – Camping World Holdings has 3 warning signs (and 2 that are worrying) that we think you should know about.
- management:Have insiders been adding to their shares to take advantage of market sentiment on CWH’s future prospects? Check out our management and board analysis for insights into CEO pay and governance factors.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of quality stocks to get an idea of what else you might be missing!
hp The Simply Wall St app runs a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, just search here.
Do you have any feedback about this article? Concerned about the content? Get in touch directly with us. Alternatively, send an email to the editorial team (at) simplywallst.com.
This Simply Wall St article is of a general nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your goals or financial situation. Our goal is to offer you long-term focused analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned.