Do YouGov plc (LON: YOU) investors pay above intrinsic value?
Does the December share price for YouGov plc (LON: YOU) reflect its true value? Today we’re going to estimate the intrinsic value of the stock by projecting its future cash flows and then discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it’s not too hard to follow, as you will see in our example!
We generally think of a business’s value as the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. If you still have burning questions about this type of valuation, take a look at the Simply Wall St.
See our latest analysis for YouGov
Is YouGov valued enough?
We use the 2-step growth model, which simply means that we take into account two stages of business growth. During the initial period, the business can have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. To begin with, we need to estimate the next ten years of cash flow. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year free cash flow (FCF) forecast
|Leverage FCF (£, Million)||£ 28.3million in UK||United Kingdom £ 35.5million||United Kingdom £ 45.0 million||UK £ 50.2m||£ 54.4million in UK||UK £ 57.8million||United Kingdom £ 60.4million||United Kingdom £ 62.5million||United Kingdom £ 64.2 million||United Kingdom £ 65.5million|
|Source of estimated growth rate||Analyst x3||Analyst x3||Analyst x1||Est @ 11.58%||Est @ 8.37%||Est @ 6.13%||East @ 4.56%||East @ 3.46%||East @ 2.69%||Est @ 2.16%|
|Present value (£, millions) discounted at 4.9%||United Kingdom £ 27.0||United Kingdom £ 32.3||United Kingdom £ 38.9||United Kingdom € 41.4||United Kingdom £ 42.8||United Kingdom £ 43.3||United Kingdom £ 43.1||United Kingdom £ 42.5||United Kingdom £ 41.6||United Kingdom £ 40.5|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = £ 393 million in the UK
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. 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 used the 5-year average of the 10-year government bond yield (0.9%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 4.9%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = UK £ 66m × (1 + 0.9%) ÷ (4.9% –0.9%) = UK £ 1.6b
Present value of terminal value (PVTV)= TV / (1 + r)ten= UK £ 1.6b ÷ (1 + 4.9%)ten= £ 1.0 billion in the UK
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is £ 1.4 billion. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current UK £ 15.4 share price, the company appears to be slightly overvalued at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
The above calculation is very dependent on two assumptions. One is the discount rate and the other is the cash flow. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we view YouGov 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 takes into account debt. In this calculation, we used 4.9%, which is based on a leveraged beta of 0.825. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our industry average beta from comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
To move on :
While important, calculating DCF is just one of the many factors you need to assess for a business. It is not possible to achieve a rock-solid valuation with a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. Why is intrinsic value lower than the current share price? For YouGov, we’ve compiled three relevant things to consider:
- Risks: To do this, you need to know the 2 warning signs we spotted with YouGov.
- Future benefits: How does YOU’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality stocks to get a feel for what you might be missing!
PS. Simply Wall St updates its DCF calculation for every UK stock every day, so if you want to find the intrinsic value of any other stock just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.