The intrinsic value of Altice USA, Inc. (NYSE: ATUS) is potentially 78% greater than its share price
How far is Altice USA, Inc. (NYSE: ATUS) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by taking the company’s future cash flow forecast and discounting it to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion. Don’t be put off by the lingo, the math is actually pretty straightforward.
There are many ways businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. Anyone who wants to learn a little more about intrinsic value should read the Simply Wall St.
See our latest analysis for Altice USA
The model
We use the 2-step growth model, which simply means that we take into account two stages of business growth. In the initial period, the business can have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. To begin with, we need to estimate the next ten years of cash flow. 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.
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 today’s value:
10-year Free Cash Flow (FCF) estimate
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF ($, Millions) | US $ 1.66 billion | US $ 1.78 billion | 2.11 billion US dollars | US $ 2.24 billion | US $ 2.35 billion | US $ 2.43 billion | 2.51 billion US dollars | US $ 2.58 billion | 2.65 billion US dollars | US $ 2.72 billion |
Source of estimated growth rate | Analyst x14 | Analyst x7 | Analyst x5 | Analyst x5 | Is 4.54% | East @ 3.78% | East @ 3.24% | East @ 2.86% | East @ 2.6% | East @ 2.42% |
Present value (in millions of dollars) discounted at 9.6% | US $ 1.5k | US $ 1.5k | US $ 1.6k | US $ 1.6k | US $ 1.5k | US $ 1.4k | 1.3k USD | US $ 1.2k | US $ 1.2k | US $ 1.1k |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 14 billion
It is now a matter of calculating the Terminal Value, which takes into account all future cash flows after this ten-year period. 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 9.6%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = US $ 2.7B × (1 + 2.0%) ÷ (9.6% – 2.0%) = US $ 36B
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= US $ 36 billion ÷ (1 + 9.6%)^{ten}= US $ 15 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 $ 28 billion. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of US $ 34.6, the company looks fairly good value at a 44% discount from the current share 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.
The hypotheses
We emphasize that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. 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 full picture of a company’s potential performance. Since we view Altice USA 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 9.6%, which is based on a leveraged beta of 1.615. 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 an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
To move on :
While a business valuation is important, ideally it won’t be the only piece of analysis you will look at for a business. The DCF model is not a perfect equity valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. What is the reason why the stock price is below intrinsic value? For Altice USA, we’ve put together three additional factors to consider:
- Risks: Note that Altice USA shows 3 warning signs in our investment analysis , and 2 of them concern …
- Management: Have insiders increased their stocks to take advantage of market sentiment about ATUS ‘future prospects? Check out our management and board analysis with information on CEO compensation and governance factors.
- 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 else you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for every NYSE share. If you want to find the calculation for other actions, do a search here.
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This Simply Wall St article is general in nature. 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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