Today we’re going to go over one way to estimate the intrinsic value of ManTech International Corporation (NASDAQ: MANT) by projecting its future cash flows, then discounting them to today’s value. One way to do this is to use the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they are fairly easy to follow.
We draw your attention to the fact that there are many ways to assess a business and, like DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in knowing a little more about intrinsic value should read the Simply Wall St analysis model.
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 get cash flow estimates for the next ten years. Since no free cash flow analyst estimate is available, we have extrapolated the previous free cash flow (FCF) from the last reported value of the company. 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) estimate
|Leverage FCF ($, Millions)||145.8 million US dollars||148.7 million US dollars||US $ 151.7 million||154.7 million US dollars||US $ 157.8 million||US $ 161.0 million||164.2 million US dollars||167.5 million US dollars||US $ 170.8 million||US $ 174.2 million|
|Source of estimated growth rate||East @ 2.02%||East @ 2.01%||Is @ 2%||Is @ 2%||Is @ 2%||Is @ 1.99%||Is @ 1.99%||Is @ 1.99%||Is @ 1.99%||Is @ 1.99%|
|Present value (in millions of dollars) discounted at 6.3%||USD 137||$ 132||$ 126||US $ 121||116 USD||US $ 111||107 USD||103 USD||US $ 98.4||$ 94.4|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 1.1 billion
We now need to calculate the Terminal Value, which takes into account all future cash flows after this ten year period. 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 their present value, using a cost of equity of 6.3%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 174 million × (1 + 2.0%) ÷ (6.3% – 2.0%) = US $ 4.1 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 4.1 billion ÷ (1 + 6.3%)ten= US $ 2.2 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 3.4 billion. In the last step, we divide the equity value by the number of shares outstanding. From the current share price of US $ 76.9, the company appears to be roughly at fair value at a discount of 7.2% from the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
NasdaqGS: MANT Discounted cash flow September 12, 2021
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. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. 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 ManTech International 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 6.3%, which is based on a leveraged beta of 0.917. 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.
Move on :
While a business valuation is important, it shouldn’t be the only metric you look at when researching a business. It is not possible to achieve a rock-solid valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on 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. For ManTech International, we have compiled three essential aspects that you should take a look at:
- Risks: Consider for example the ever-present specter of investment risk. We have identified 1 warning sign with ManTech International , and understanding this should be part of your investing process.
- Management: Have insiders increased their stocks to take advantage of market sentiment about MANT’s 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? To explore our interactive list of high quality actions to get an idea of what else you might be missing!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each NASDAQGS share. If you want to find the calculation for other actions just search here.
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