CH Robinson Worldwide, Inc. (NASDAQ: CHRW) Shares May Be 23% Less Than Estimated Embedded Value
Today we’re going to review one way to estimate the intrinsic value of CH Robinson Worldwide, Inc. (NASDAQ: CHRW) by taking expected future cash flows and discounting them to today’s value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too hard to follow, as you will see in our example!
There are many ways businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something of interest to you.
Crunch the numbers
We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. 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 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.
Generally, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:
10-year Free Cash Flow (FCF) estimate
|Leverage FCF ($, Millions)||US $ 743.5 million||US $ 764.1 million||US $ 758.9 million||US $ 748.5 million||US $ 746.2 million||US $ 749.0 million||US $ 755.3 million||$ 764.2 million||US $ 775.1 million||US $ 787.3 million|
|Source of estimated growth rate||Analyst x6||Analyst x3||Analyst x2||Analyst x2||East @ -0.31%||East @ 0.37%||Is @ 0.85%||Est @ 1.18%||Est @ 1.42%||Est @ 1.58%|
|Present value (in millions of dollars) discounted at 6.3%||US $ 699||US $ 676||US $ 632||586 USD||US $ 550||US $ 519||US $ 492||US $ 468||$ 447||$ 427|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 5.5 billion
The second stage is also known as terminal value, this is the cash flow of the business after 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 their present value, using a cost of equity of 6.3%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 787 million × (1 + 2.0%) ÷ (6.3% – 2.0%) = US $ 18 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 18 billion ÷ (1 + 6.3%)ten= US $ 10 billion
The total value is the sum of the cash flows for the next ten years plus the final present value, which gives the total value of equity, which in this case is US $ 16 billion. In the last step, we divide the equity value by the number of shares outstanding. From the current price of US $ 90.7, the company appears to be slightly undervalued at a 23% discount from the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
NasdaqGS: CHRW Discounted Cash Flow October 10, 2021
Now the most important inputs to a discounted cash flow are the discount rate and, of course, the actual 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 consider CH Robinson Worldwide to be a potential shareholder, 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 6.3%, which is based on a leveraged beta of 0.993. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
To move on :
While important, calculating DCF ideally won’t be the only piece of analysis you’ll look at for a business. The DCF model is not a perfect equity valuation tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” 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 greater than the current share price? For CH Robinson Worldwide, we have compiled three more factors that you need to assess:
- Risks: As an example, we have found 4 warning signs for CH Robinson Worldwide (3 shouldn’t be ignored!) That you should consider before investing here.
- Management: Have insiders increased their stocks to take advantage of market sentiment about CHRW’s future prospects? Check out our management and board analysis with information on CEO compensation and governance factors.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid trading fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app performs a daily discounted cash flow valuation for each NASDAQGS share. If you want to find the calculation for other actions, 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 material. Simply Wall St has no position in the mentioned stocks.
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