The intrinsic value of ManTech International Corporation (NASDAQ:MANT) is potentially 37% higher than its stock price

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How far is ManTech International Corporation (NASDAQ:MANT) of its intrinsic value? Using the most recent financial data, we will examine whether the stock price is fair by taking expected future cash flows and discounting them to their present value. On this occasion, we will use the Discounted Cash Flow (DCF) model. Patterns like these may seem beyond a layman’s comprehension, but they’re pretty easy to follow.

Remember though 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 Template.

Check out our latest analysis for ManTech International

The method

We will use a two-stage 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 “sustained growth”. To start, we need to estimate the cash flows for the next ten years. Since no analyst estimates of free cash flow are available to us, we have extrapolated the previous free cash flow (FCF) from the company’s latest reported 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 more in early years than in 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

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Leveraged FCF ($, millions)

$171.9 million

$171.7 million

$172.5 million

$174.2 million

$176.4 million

$178.9 million

$181.8 million

$184.9 million

$188.2 million

$191.7 million

Growth rate estimate Source

East @ -1%

Is @ -0.11%

Is at 0.51%

Is 0.95%

Is at 1.25%

Is at 1.46%

Is at 1.61%

Is at 1.72%

Is at 1.79%

Is at 1.84%

Present value (in millions of dollars) discounted at 5.9%

$162

US$153

$145

$138

$132

US$127

$121

$117

$112

$108

(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $1.3 billion

The second stage is also known as the 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 10-year government bond yield of 2.0%. We discount terminal cash flows to present value at a cost of equity of 5.9%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = $192 million × (1 + 2.0%) ÷ (5.9%–2.0%) = $4.9 billion

Present value of terminal value (PVTV)= TV / (1 + r)ten= $4.9 billion ÷ (1 + 5.9%)ten= $2.8 billion

The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is $4.1 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$72.9, the company looks slightly undervalued at a 27% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep that in mind.

dcf

The hypotheses

The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the 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, nor the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider 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 5.9%, which is based on a leveraged beta of 0.906. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.

Next steps:

While important, calculating DCF shouldn’t be the only metric to consider when researching a business. DCF models are not the be-all and end-all of investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, changes in the company’s cost of equity or the risk-free rate can have a significant impact on the valuation. Why is intrinsic value higher than the current stock price? For ManTech International, there are three relevant aspects that you should examine in more detail:

  1. Risks: We believe that you should evaluate the 1 warning sign for ManTech International we reported before investing in the company.

  2. Future earnings: How does MANT’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free chart of analyst growth expectations.

  3. 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 strong trading fundamentals to see if there are any other businesses you may not have considered!

PS. The Simply Wall St app performs a daily updated cash flow assessment for each NASDAQGS stock. If you want to find the calculation for other stocks just search here.

Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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