Is Plantronics, Inc. (NYSE: PLT) trading at a 46% discount?
How far is Plantronics, Inc. (NYSE: PLT) from its intrinsic value? Using the most recent financial data, we’ll examine whether the share price is fair by estimating the company’s future cash flows and discounting them to their present value. The DCF (Discounted Cash Flow) model is the tool we will apply to do this. Don’t be put off by the lingo, the math is actually pretty straightforward.
There are many ways that businesses can be valued, so we would like to stress that a DCF is not perfect for all situations. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
The model
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. 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 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, and therefore the sum of these future cash flows is then discounted to present value:
10-year Free Cash Flow (FCF) forecast
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Levered FCF ($, million) | $ 133.0 million | $ 151.1 million | $ 181.6 million | 204.1 million USD | $ 223.1 million | $ 238.9 million | $ 252.3 million | $ 263.7 million | $ 273.7 million | 282.6 million USD |
Source of estimated growth rate | Analyst x2 | Analyst x2 | Analyst x2 | Is at 12.41% | Is 9.3% | Est @ 7.12% | Is 5.6% | Is 4.53% | Is 3.78% | Is at 3.26% |
Present value ($, millions) discounted at 9.5% | US $ 122 | $ 126 | US $ 138 | 142 USD | 142 USD | US $ 139 | US $ 134 | US $ 128 | 121 USD | US $ 115 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = 1.3 billion USD
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 step. 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 9.5%.
Terminal value (TV)= FCF_{2030} Ã— (1 + g) Ã· (r – g) = $ 283 million Ã— (1 + 2.0%) Ã· (9.5% – 2.0%) = $ 3.9 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $ 3.9 billion Ã· (1 + 9.5%)^{ten}= 1.6 billion USD
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is US $ 2.9 billion. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of US $ 40.0, the company appears to be good value for money with a 46% discount from the current stock price. The assumptions in any calculation have a big impact on the valuation, so it’s best to take this as a rough estimate, not precise down to the last penny.
NYSE: PLT Discounted Cash Flow May 1, 2021
Important assumptions
Now the most important data for a discounted cash flow is the discount rate and, of course, the actual cash flow. You don’t have to agree with these entries, I recommend that you redo the math yourself and play around with it. 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 Plantronics 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 9.5%, which is based on a leveraged beta of 1.418. 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.
To move on:
Valuation is only one side of the coin in terms of building your investment thesis, and ideally it won’t be the only analysis you look at for a business. DCF models are not the alpha and omega of investment valuation. Preferably, you would apply different cases and assumptions and see how they would impact the valuation of the business. 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 Plantronics, we’ve put together three relevant things that you should take a closer look at:
- Risks: As an example, we found 2 warning signs for Plantronics that you need to take into account before investing here.
- Future income: How does PLT’s growth rate compare to its peers and the market in general? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth forecast chart.
- Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high quality inventory 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. It does not constitute 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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