Today we are going to review a valuation method used to estimate the attractiveness of Bluegreen Vacations Holding Corporation (NYSE: BVH) as an investment opportunity by estimating the company’s future cash flows and by discounting them to their current value. One way to do this is to use the Discounted Cash Flow (DCF) model. 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.
Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. If you want to know more about discounted cash flows, the rationale for this calculation can be read in detail in the Simply Wall St analysis model.
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Crunch the numbers
We are going to use a two-step DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “steady growth”. 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 latest 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, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year free cash flow (FCF) forecast
|Leverage FCF ($, Millions)||US $ 68.7 million||US $ 77.0 million||US $ 73.8 million||US $ 72.1 million||US $ 71.3 million||US $ 71.2 million||US $ 71.6 million||$ 72.3 million||US $ 73.2 million||US $ 74.2 million|
|Source of estimated growth rate||Analyst x1||Analyst x1||Is @ -4.15%||East @ -2.32%||Is @ -1.04%||East @ -0.14%||East @ 0.49%||Est @ 0.93%||Est @ 1.24%||Est @ 1.46%|
|Present value (in millions of dollars) discounted at 9.8%||$ 62.6||$ 63.9||$ 55.7||US $ 49.6||$ 44.7||$ 40.7||US $ 37.2||US $ 34.2||US $ 31.5||US $ 29.1|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 449 million US dollars
We now need to calculate 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 9.8%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 74 million × (1 + 2.0%) ÷ (9.8% – 2.0%) = US $ 965 million
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 965 million ÷ (1 + 9.8%)ten= US $ 379 million
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is $ 828 million. In the last step, we divide the equity value by the number of shares outstanding. From the current share price of US $ 29.8, the company appears to be slightly undervalued at a 24% discount from the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
We draw your attention to the fact 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 consider Bluegreen Vacations Holding 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 9.8%, which is based on a leveraged beta of 1.790. 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 comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
While valuing a business is important, it’s just one of the many factors you need to assess for a business. The DCF model is not a perfect stock assessment 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, changes in the company’s cost of equity or the risk-free rate can have a significant impact on valuation. Why is intrinsic value greater than the current share price? For Bluegreen Vacations Holding, we have compiled three other factors that you should take a closer look at:
- Risks: Consider, for example, the ever-present specter of investment risk. We have identified 3 warning signs with Bluegreen Vacations Holding (at least 1 which is significant), and understanding them should be part of your investment process.
- Future benefits: How does BVH’s growth rate compare to that of its peers and the wider market? Dig deeper into the analyst consensus count for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: Low debt, high returns on equity and good past performance are fundamental 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. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. 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 documents. Simply Wall St has no position in the mentioned stocks.
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