Is Accel Entertainment, Inc. (NYSE: ACEL) worth $ 13.2 based on intrinsic value?
Does Accel Entertainment, Inc.’s (NYSE: ACEL) share price in May reflect what it is really worth? Today we’re going to estimate the intrinsic value of the stock by taking expected future cash flows and discounting them to present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Before you think you won’t be able to figure it out, read on! It’s actually a lot less complex than you might imagine.
There are many ways that businesses can be valued, so we would like to stress that a DCF is not perfect for all situations. Anyone interested in learning a little more about intrinsic value should have a read of the Simply Wall St.
See our latest review for Accel Entertainment
Is Accel Entertainment valued enough?
We use what is called a 2-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 lower growth stage. First, we need to estimate the cash flow of the business 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 last estimate or the last reported value. We assume that companies with decreasing free cash flow will slow their withdrawal rate, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow down more in the early years than in the later 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 these future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) estimate
|Levered FCF ($, million)||$ 19.3 million||$ 92.0 million||$ 85.0 million||$ 81.2 million||$ 79.1 million||78.1 million USD||$ 77.9 million||78.3 million USD||$ 79.0 million||$ 79.9 million|
|Source of estimated growth rate||Analyst x3||Analyst x3||Analyst x1||Is at -4.52%||Is at -2.57%||Is at -1.2%||Is at -0.24%||Is 0.43%||Is 0.9%||Is 1.22%|
|Present value ($, millions) discounted at 8.3%||$ 17.8||US $ 78.4||US $ 66.8||US $ 58.9||$ 53.0||$ 48.3||$ 44.5||$ 41.2||US $ 38.4||US $ 35.9|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = 483 million USD
The second stage is also known as terminal value, it 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 8.3%.
Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = $ 80 million × (1 + 2.0%) ÷ (8.3% – 2.0%) = $ 1.3 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= 1.3 billion USD ÷ (1 + 8.3%)ten= $ 576 million
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is US $ 1.1 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 $ 13.2, the company appears to be slightly overvalued at the time of writing. Remember though, this is only a rough estimate, and like any complex formula – garbage in, garbage out.
The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. If you don’t agree with these results, try the calculation yourself and play with the 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 complete picture of a company’s potential performance. Since we view Accel Entertainment 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 8.3%, which is based on a leveraged beta of 1.346. 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 of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
While valuing a business is important, it is only one of the many factors you need to assess for a business. It is not possible to obtain an infallible 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?” 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 Accel Entertainment, we’ve compiled three other things that you should take a closer look at:
- Risks: We think you should rate the 3 warning signs for Accel Entertainment we reported before making an investment in the business.
- Management: Have insiders increased their shares to take advantage of market sentiment for ACEL’s future outlook? 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 essential 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. 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.
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This Simply Wall St article is general in nature. It is not a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim 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 information. Simply Wall St has no position in any of the stocks mentioned.
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