Wyndham Hotels & Resorts, Inc. (NYSE: WH) Intrinsic Value Is Potentially 19% Less Than Its Stock Price
How far is Wyndham Hotels & Resorts, Inc. (NYSE: WH) 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.
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. 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 down 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) forecast
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Levered FCF ($, million) | 283.8 million USD | $ 333.9 million | $ 254.0 million | $ 396.0 million | $ 408.0 million | $ 418.3 million | $ 428.2 million | $ 437.8 million | $ 447.3 million | $ 456.8 million |
Source of estimated growth rate | Analyst x3 | Analyst x3 | Analyst x2 | Analyst x1 | Analyst x1 | Is 2.52% | Is 2.36% | Is at 2.25% | Is 2.17% | Is 2.12% |
Present value ($, millions) discounted at 8.6% | US $ 261 | US $ 283 | US $ 198 | US $ 284 | US $ 270 | $ 255 | US $ 240 | US $ 226 | US $ 212 | 200 USD |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = 2.4 billion USD
After calculating the present value of future cash flows in the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. For a number of reasons, a very conservative growth rate is used that 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 present value, using a cost of equity of 8.6%.
Terminal value (TV)= FCF_{2030} × (1 + g) ÷ (r – g) = $ 457 million × (1 + 2.0%) ÷ (8.6% – 2.0%) = $ 7.0 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $ 7.0 billion ÷ (1 + 8.6%)^{ten}= 3.1 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 $ 5.5 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 $ 72.5, the company appears to be slightly overvalued at the time of writing. 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: WH Discounted Cash Flow May 14, 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 Wyndham Hotels & Resorts 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 represents debt. In this calculation, we used 8.6%, which is based on a leveraged beta of 1.405. 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.
Next steps:
While important, the DCF calculation is just 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. 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, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. What is the reason why the stock price exceeds intrinsic value? For Wyndham Hotels & Resorts, there are three relevant things to consider:
- Risks: Concrete example, we have spotted 2 warning signs for Wyndham Hotels & Resorts you have to be aware of this, and one of them is concerning.
- Management: Have insiders increased their stocks to take advantage of market sentiment for WH’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.
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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