The intrinsic value of ASGN Incorporated (NYSE: ASGN) is potentially 37% higher than its stock price
Today we’re going to review one way to estimate the intrinsic value of ASGN Incorporated (NYSE: ASGN) by estimating the company’s future cash flows and discounting them to their 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.
We would like to point out that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a little more about intrinsic value should have a read of the Simply Wall St.
Crunch the numbers
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.
Typically, 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 present value:
10-year Free Cash Flow (FCF) forecast
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Levered FCF ($, million) | $ 317.7 million | $ 359.3 million | $ 367.2 million | $ 375.0 million | $ 382.8 million | $ 390.7 million | $ 398.7 million | $ 406.7 million | $ 414.9 million | $ 423.2 million |
Source of estimated growth rate | Analyst x3 | Analyst x3 | Is 2.19% | Is 2.13% | Is 2.09% | Is 2.06% | Is 2.04% | Is 2.02% | Is 2.01% | Is 2.01% |
Present value ($, million) discounted at 6.7% | US $ 298 | $ 316 | US $ 302 | US $ 290 | US $ 277 | US $ 265 | US $ 254 | US $ 242 | $ 232 | $ 222 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = 2.7 billion 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 6.7%.
Terminal value (TV)= FCF_{2030} × (1 + g) ÷ (r – g) = $ 423 million × (1 + 2.0%) ÷ (6.7% – 2.0%) = $ 9.2 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= 9.2 billion USD ÷ (1 + 6.7%)^{ten}= 4.8 billion USD
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is US $ 7.5 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 $ 103, the company appears a bit undervalued with a 27% discount from the current share price. Remember though, this is only a rough estimate, and like any complex formula – garbage in, garbage out.
NYSE: ASGN Discounted Cash Flow May 29, 2021
Important assumptions
Now the most important data for a discounted cash flow is the discount rate and, of course, the actual cash flow. Part of investing is making 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 complete picture of a company’s potential performance. Since we view ASGN 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 debt into account. In this calculation, we used 6.7%, 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 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:
While important, the DCF calculation is just one of the many factors you need to assess for a business. DCF models are not the alpha and omega of investment valuation. 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. Can we understand why the company trades at a discount to its intrinsic value? For the ASGN, we have gathered three additional elements to take into account:
- Risks: We think you should rate the 1 warning sign for ASGN we reported before making an investment in the business.
- Future income: How does ASGN’s growth rate compare to its peers and to 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 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. 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, 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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