Are Investors 28% Undervaluing Vail Resorts, Inc. (NYSE: MTN)?
In this article, we’ll estimate the intrinsic value of Vail Resorts, Inc. (NYSE: MTN) by taking expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don’t be put off by the lingo, the underlying calculations are actually pretty straightforward.
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. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something of interest to you.
Step by step in the calculation
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually, the first stage is higher growth, and the second stage is a lower growth stage. To begin with, we need to get cash flow estimates for 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 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 discount the value of those future cash flows to their estimated value in today’s dollars. hui:
10-year Free Cash Flow (FCF) estimate
|Leverage FCF ($, Millions)||US $ 497.8 million||US $ 618.6 million||US $ 789.1 million||US $ 916.6 million||US $ 1.03 billion||US $ 1.12 billion||US $ 1.19 billion||US $ 1.26 billion||US $ 1.31 billion||US $ 1.36 billion|
|Source of estimated growth rate||Analyst x6||Analyst x6||Analyst x2||Est @ 16.15%||East @ 11.9%||Est @ 8.92%||Est @ 6.83%||East @ 5.37%||Est @ 4.35%||East @ 3.63%|
|Present value (in millions of dollars) discounted at 7.3%||US $ 464||US $ 537||US $ 638||US $ 691||$ 720||US $ 731||US $ 727||US $ 714||US $ 694||US $ 670|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 6.6 billion US dollars
The second stage is also known as terminal value, this is the cash flow of the business after the first stage. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 7.3%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 1.4 billion × (1 + 2.0%) ÷ (7.3% – 2.0%) = US $ 26 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 26 billion ÷ (1 + 7.3%)ten= US $ 13 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 19 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 US $ 342, the company appears a bit undervalued at a 28% discount from where the stock price is currently trading. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
NYSE: MTN Discounted Cash Flow November 22, 2021
The above calculation is very dependent on two assumptions. One is the discount rate and the other is the cash flow. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. 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 Vail Resorts 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 7.3%, which is based on a leveraged beta of 1.227. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta from globally comparable companies, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable business.
While a business valuation is important, it shouldn’t be the only metric you look at when researching a business. It is not possible to achieve a rock-solid valuation 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?” If a business grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output can be very different. Can we understand why the company trades at a discount to its intrinsic value? For Vail Resorts, we’ve compiled three more things you should dig into:
- Risks: For example, we discovered 3 warning signs for Vail Resorts (1 shouldn’t be ignored!) Which you should be aware of before investing here.
- Future benefits: How does MTN’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number 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 US stock every day, so if you want to find the intrinsic value of any other stock just search here.
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 shares 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.
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