An intrinsic calculation for CACI International Inc (NYSE:CACI) suggests it is 48% undervalued
Does the February CACI International Inc (NYSE: CACI) stock price reflect what it is really worth? Today we are going to estimate the intrinsic value of the stock by taking the expected future cash flows and discounting them to the present value. We will use the Discounted Cash Flow (DCF) model for this purpose. There really isn’t much to do, although it may seem quite complex.
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.
crush numbers
We use the 2-stage growth model, which simply means that we consider two stages of business growth. In the initial period, the company may have a higher growth rate, and the second stage is generally assumed to have a stable growth rate. In the first step, we need to estimate the company’s cash flow over the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported 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 more in early years than in later years.
Generally, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
10-Year Free Cash Flow (FCF) Forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF ($, millions) | $738.0 million | $505.3 million | $572.5 million | $577.6 million | $584.6 million | $593.1 million | $602.5 million | $612.8 million | $623.7 million | $635.1 million |
Growth rate estimate Source | Analyst x4 | Analyst x3 | Analyst x2 | Is at 0.9% | Is at 1.22% | Is at 1.44% | Is at 1.59% | Is at 1.7% | Is at 1.78% | Is at 1.83% |
Present value (in millions of dollars) discounted at 6.7% | $691 | $444 | $471 | $445 | $422 | $401 | $382 | $364 | $347 | $331 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $4.3 billion
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. For a number of reasons, a very conservative growth rate is used which 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 (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 6.7%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = US$635 million × (1 + 2.0%) ÷ (6.7%–2.0%) = US$14 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $14 billion ÷ (1 + 6.7%)^{ten}= $7.1 billion
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is $11 billion. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of US$254, the company looks quite undervalued at a 48% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in a different galaxy. Keep that in mind.
Important assumptions
We emphasize 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 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 complete picture of a company’s potential performance. Since we consider CACI International as a potential shareholder, the cost of equity is used as the discount rate, and not the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 6.7%, which is based on a leveraged beta of 1.092. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Let’s move on :
While important, the DCF calculation will ideally not be the only piece of analysis you look at for a business. The DCF model is not a perfect stock valuation tool. Instead, the best use of 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 have a significant impact on the valuation. Why is intrinsic value higher than the current stock price? For CACI International, there are three fundamental factors to consider:
- Risks: For this purpose, you must know the 2 warning signs we spotted with CACI International.
- Management: Did insiders increase their shares to take advantage of market sentiment on CACI’s future prospects? View our management and board analysis with insights into CEO compensation and governance factors.
- Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!
PS. The Simply Wall St app performs a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, search here.
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