Is Red Hat undervalued based on future cash flows and its price relative to the stock market?
Value is all about what a company is worth versus what price it is available for. If you went into a grocery store and all the bananas were on sale at half price, they could be considered undervalued.
INTRINSIC VALUE BASED ON FUTURE CASH FLOWS
Here we compare the current
share price of Red Hat to its discounted cash flow value.
The discounted cash flow value is simply looking at what the company is worth today, based on estimates of how much money it is expected to make in the future.
How is this discounted cash flow calculated?
- The current share price of Red Hat is above its future cash flow value.
Often investors are willing to pay a premium for a company that has a high dividend or the potential for future growth.
We assess Red Hat's value by looking at:
- Is the discounted cash flow value less than 20%, or 40% of the share price? (2 checks) (Click here or on bar chart for details of DCF calculation.)
- Is the PE ratio less than the market average, and/ or less than the Software industry average (and greater than 0)? (2 checks)
- Is the PEG ratio within a reasonable range (0 to 1)? (1 check)
- Is the PB ratio less than the Software industry average (and greater than 0)? (1 check)
Red Hat has a total score of 0/6, see the detailed checks below.
Note: We use GAAP Earnings per Share in all our calculations including PE and PEG Ratio.
Note 2: PEG ratio is based on analysts EPS growth expectations in 1 year (26.7%).
Full details on the Value part of the Simply Wall St company analysis model.
Discounted cash flow (Free cash flow to Equity)
The calculations below outline how an intrinsic value for Red Hat is arrived at by discounting future cash flows to their present value. We use analyst's estimates of cash flows going forward 5 years.
5 year cash flow forecast
See our documentation to learn about this calculation.
|Levered FCF (USD, Millions)
||Extrapolated @ (16.23%)
||Extrapolated @ (16%, capped from 16.23%)
Discounted (@ 10.1%)
Present value of next 5 years cash flows:
Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)
Terminal Value = $1,224 × (1 + 2.3%) ÷ (10.15% – 2.3%)
Terminal value based on the Perpetuity Method where growth (g) = 2.3%:
Present value of terminal value:
Equity Value (Total value) = Present value of next 5 years cash flows + terminal value
Value = Total value / Shares Outstanding ($13,313 / 177)
Value per share:
Current discount (share price of $104.89): -40%
Estimate of Discount Rate
The discount rate, or required rate of return, is estimated by calculating the Cost of Equity.
Discount rate = Cost of Equity = Risk Free Rate + (Levered Beta * Equity Risk Premium)
Discount rate = 10.15% = 2.33% + (1.019 * 7.67%)
Estimate of Bottom Up Beta
The Levered Beta is the Unlevered Beta adjusted for financial leverage. It is limited to 0.8 to 2.0 (practical range for a stable firm).
Levered Beta = Unlevered beta (1 + (1- tax rate) (Debt/Equity))
1.019 = 0.991 (1 + (1- 30%) (4.04%))
Levered Beta used in calculation = 1.019
- The risk free rate of 2.33% is from the 10 year government bond rate in US.
- The bottom-up beta is estimated by analysing other companies in the same industry.
- The Equity Risk Premium is calculated by subtracting the risk free rate from the market return premium (10%) (source: Buffet).
- The dividend discount model is automatically used for companies in the following industries: Banks, Insurance, Real Estate Investment Trusts (REITs), Diversified Financial Services and Capital Markets.
How is Red Hat expected to perform in the next 1 to 3 years based on estimates from 28 analysts?
The future performance of a company is measured in the same way as past performance, by looking at estimated growth and how much profit it is expected to make.
Future estimates come from professional analysts. Just like forecasting the weather, they don’t always get it right!
Expected earnings growth over 1 year.
Future Earnings growth analysis
Is Red Hat expected to grow at an attractive rate? We look at the 1 year and 3 year growth below.
Are Red Hat's annual earnings growth expected to exceed 3.4% over the next 3 years?
- After 1 year
- + 3 year earnings data not available.
1 & 3 year estimated growth in earnings
Past and Future Earnings per Share
The accuracy of the analysts who estimate the future performance data can be gauged below. We look back 3 years and see if they were any good at predicting what actually occured. We also show the highest and lowest estimates looking forward to see if there is a wide range.
Analysts growth expectations
2 year growth check
Which of the these is expected to increase by over 50% in 2 year's time?
Performance in 3 years
In the same way as past performance we look at the future estimated return (profit) compared to the available funds. We do this looking forward 3 years.
- Red Hat is expected to perform strongly, Return on Equity (ROE) in 3 years is estimated to be above 20%.
Improvement & Relative to industry
- Expected to be above the Software industry average.
- A decline in Red Hat's performance (ROE) is expected over the next 3 years.
Future performance checks
We assess Red Hat's future performance by looking at:
- Is the growth in earnings expected to beat the low risk savings rate, plus a premium to keep pace with inflation, in 1 year and 3 years? (2 checks)
- Does the average analyst expect Revenue to increase by 50% or more in 2 years? (1 check)
- Does the average analyst expect Operating Cash Flow to increase by 50% or more in 2 years? (1 check)
- Does the average analyst expect Net Income (Profit) to increase by 50% or more in 2 years? (1 check)
- Is the Return on Equity in 3 years expected to be over 20%? (1 check)
Some of the above checks will fail if the company is expected to be loss making in the relevant year.
Red Hat has a total score of 3/6, see the detailed checks below.
Note: If no +3 year data is available, +2.5 year data may be used.
Note 2: We use GAAP per Share in all our calculations.
Full details on the Future part of the Simply Wall St company analysis model.
How has Red Hat performed over the past 5 years?
The past performance of a company can be measured by how much growth it has experienced and how much profit it makes relative to the funds and assets it has available.
Past earnings growth
Below we compare Red Hat's growth in the last year to its industry (Software).
Past Earnings growth analysis
We also check if the company has grown in the past 5 years, and whether it has maintained that growth in the year.
- Red Hat's earnings growth has exceeded the industry average over the past year.
- Red Hat's 1 year earnings growth exceeds its 5 year annual average (27.6% vs 13.3%).
- Red Hat has improved earnings in the past 5 years.
Red Hat's revenue and profit over the past 5 years is shown below, any years where they have experienced a loss will show up in red.
Performance last year
We want to ensure a company is making the most of what it has available. This is done by comparing the return (profit) to a company's available funds, assets and capital.
- Strong return on shareholders funds (ROE) last year.
- Red Hat performed worse than the Software industry average based on return on assets (ROA) last year.
- Performance based on revenue producing assets (ROCE) is broadly the same over 3 years.
Past performance checks
We assess Red Hat's performance over the past 5 years by checking for:
- Has earnings per share (EPS) increased in past 5 years? (1 check)
- Has the EPS growth in the last year exceeded that of the Software industry? (1 check)
- Is the current EPS growth higher than the average annual growth over the past 5 years? (1 check)
- Is the Return on Equity (ROE) higher than 20%? (1 check)
- Is the Return on Assets (ROA) above industry average? (1 check)
- Has the Return on Capital Employed (ROCE) increased from 3 years ago? (1 check)
The above checks will fail if the company has reported a loss in the most recent earnings report. Some checks require at least 3 or 5 years worth of data.
Red Hat has a total score of 5/6, see the detailed checks below.
Note: We use GAAP Earnings per Share in all our calculations.
Full details on the Past part of the Simply Wall St company analysis model.
How is Red Hat's financial health and their level of debt?
A company's financial position is much like your own financial position, it includes everything you own (assets) and owe (liabilities).
The boxes below represent the relative size of what makes up Red Hat's finances.
The net worth of a company is the difference between its assets and liabilities.
- Red Hat is able to meet its short term (1 year) commitments with its holdings of cash and other short term assets.
- Red Hat's cash and other short term assets cover its long term commitments.
This treemap shows a more detailed breakdown of Red Hat's finances.
If any of them are yellow this indicates they may be out of proportion and red means they relate to one of the checks below.
Liabilities and shares
The 'shares' portion represents any funds contributed by the owners (shareholders) and any profits.
- Low level of unsold assets
- Total debt is covered by short term assets.
Nearly all companies have debt. Debt in itself isn’t bad, however if the debt is too high, or the company can’t afford to pay the interest on its debts this may have impacts in the future.
The graphic below shows equity (available funds) and debt, we ideally want to see the red area (debt) decreasing.
If there is any debt we look at the companies capability to repay it, and whether the level has increased over the past 5 years.
- The level of debt (58%) compared to net worth is high (greater 40%).
- The level of debt compared to net worth has increased over the past 5 years (0% vs 58% today).
- Total debt is well covered by annual operating cash flow (greater than 20% of total debt).
- Interest on debt is well covered by earnings (36.3x coverage).
Financial health checks
We assess Red Hat's financial health by checking for:
Full details on the Health part of the Simply Wall St company analysis model.
- Are short term assets greater than short term liabilities? (1 check)
- Are short term assets greater than long term liabilities? (1 check)
- Has the debt to equity ratio increased in the past 5 years? (1 check)
- Is the debt to equity ratio over 40%? (1 check)
- Is the debt covered by short term assets? (1 check)
- Are earnings greater than 5x the interest on debt (if comapany pays interest at all)? (1 check)
Red Hat has a total score of 4/6, see the detailed checks below.
What is Red Hat's current dividend yield, its reliability and sustainability?
Dividends are regular cash payments to you from the company, similar to a bank paying you interest on a savings account.
Annual Dividend Income
Current annual income from Red Hat dividends.
If you bought $2,000 of Red Hat shares you are expected to receive $0 in your first year as a dividend.
Here we look how much dividend is being paid, if any. Is it above what you can get in a savings account?
It is up there with the best dividend paying companies?
- Paying below low risk savings rate. (2.25%)
- Paying below the markets top dividend payers. (3.18%)
Historical dividend yield
It is important to see if the dividend for a company is stable, and not wildly increasing/decreasing each year. This graph shows you the historical rate to count toward your assessment of the stock.
We also check to see if the dividend has increased in the past 10 years.
- Not paying a notable dividend.
- Not paying a notable dividend.
Current Payout to shareholders
What portion of Red Hat's earnings are paid to the shareholders as a dividend.
- Not paying a notable dividend.
Future Payout to shareholders
- Insufficient estimate data to determine if a dividend will be paid in 3 years.
Income/ dividend checks
We assess Red Hat's dividend by checking for:
Full details on the Dividends part of the Simply Wall St company analysis model.
- Firstly is the company paying a notable dividend (greater than 0.5%) - if not then the rest of the checks are ignored.
- Current dividend yield, is there one at all, is it higher than the low risk savings rate, and is it above the top 25% of dividend payers? (2 checks)
- Have they paid a dividend for 10 years, and during this period has the dividend been volatile (drop of more than 25%)? (1 check)
- If they have paid a dividend for 10 years has it increased in this time? (1 check)
- How sustainable is the dividend, can Red Hat afford to pay it from its earnings today and in 3 years (Payout ratio less than 90%)? (2 checks)
Red Hat has a total score of 0/6, see the detailed checks below.
What is the CEO of Red Hat's salary, the management and board of directors tenure and is there insider trading?
Management is one of the most important areas of a company. We look at unreasonable CEO compensation, how long the team and board of directors have been around for and insider trading.
Mr. James M. Whitehurst, also known as Jim, has been the Chief Executive Officer and President of Red Hat, Inc. since January 1, 2008. Mr. Whitehurst served as the Chief Operating Officer of Delta Air Lines, Inc. from July 20, 2005 to August 2007 and Senior Vice President and Chief Network and Planning Officer from June 1, 2004 to July 2005. From 2002 to 2004, Mr. Whitehurst served as Senior Vice President, Finance, Treasury & Business Development for Delta. He was responsible for Network Planning, Scheduling, Fleet Planning, Strategic & Corporate Planning and Business Development of Delta Air Lines, Inc. Mr. Whitehurst served as Managing Director of Boston Consulting Group and was its Partner. Prior to joining Delta Airlines in 2002, he served as a Vice President and Director of Boston Consulting Group from 1997 to 2001 and held various leadership roles in their Chicago, Hong Kong, Shanghai and Atlanta offices. He has been an Independent Director of United Continental Holdings, Inc. since March 7, 2016 and SecureWorks Corp. since April 21, 2016. He has been a Director of Red Hat, Inc. since January 1, 2008. He serves as a Director at United Airlines, Inc. He serves as a Member of International Advisory Board at Banco Santander, S.A. He served as a Director at DigitalGlobe, Inc. from August 2009 to May 26, 2016. In June 2015, he published a book with Harvard Business Review Press entitled "The Open Organization: Igniting Passion and Performance". He holds a Bachelor's Degree in Computer Science and Economics from Rice University in Houston, Texas. He holds a General Course Degree from the London School of Economics and an MBA from Harvard Business School. He also attended Friedrich-Alexander University in Erlangen.
- CEO's compensation has been consistent with company performance over the past year.
- CEO's compensation is higher than average for a company of this size and profit level.
Management Team Tenure
Average tenure of the Red Hat management team:
- The average tenure for the Red Hat management team is over 5 years, this suggests they are a seasoned and experienced team.
Executive VP & CFO
Executive VP and President of Products & Technologies
Executive Vice President of Global Sales & Services
Chief Information Officer
Board of Directors Tenure
Average tenure of the Red Hat board of directors:
- The tenure for the Red Hat board of directors is about average.
Board of Directors
Chairman of the Board
Recent Insider Trading
- Red Hat insiders have sold more shares than they have bought in the past 3 months.
Who owns this company?
We assess Red Hat's management by checking for:
- Is the CEO's compensation unreasonable compared to market cap and profit (greater than 0.5% of the company's profit + 0.03% of market cap)? (1 check)
- Has the CEO's compensation increased more than 20% whilst the EPS is down more then 20%? (1 check)
- Is the average tenure of the management team less than 2 years? (1 check)
- Is the average tenure of the board of directors team less than 3 years? (1 check)
Red Hat has a total score of 6/6, this is not included on the snowflake, see the detailed checks below.
Note: We use the top 6 management executives and board members in our calculations.
Note 2: Insider trading include any internal stakeholders and these transactions
Full details on the Management part of the Simply Wall St company analysis model.
Red Hat, Inc. provides open source software solutions to develop and offer operating system, virtualization, management, middleware, cloud, mobile, and storage technologies to various enterprises worldwide. It offers infrastructure-related solutions, such as Red Hat Enterprise Linux, an operating system platform that runs on hardware for use in hybrid cloud environments; Red Hat Satellite, a system management offering that helps to deploy, scale, and manage in hybrid cloud environments; and Red Hat Enterprise Virtualization, a software solution that allows customers to utilize and manage a common hardware infrastructure to run multiple operating systems and applications. The company offers application development-related and other technology solutions, such as Red Hat JBoss Middleware, a solution for developing, deploying, and managing applications; integrating applications, data, and devices; and automating business processes in hybrid cloud environments; Red Hat cloud offerings, a software solution that enables customers to build and manage various cloud computing environments; Red Hat Mobile, a software development platform that enables customers to develop, integrate, deploy, and manage mobile applications for enterprises; and Red Hat Storage, a software solution that enables customers to manage large, unstructured, or semi-structured data in hybrid cloud environments. It also provides consulting, support, and training services; and real-time operating system, distributed computing, directory services, and user authentication. Red Hat, Inc. has a collaboration with Wipro Limited to set up a cloud application factory that offers developers and IT teams a methodology for application modernization across public, private, and hybrid clouds. The company was formerly known as Red Hat Software, Inc. and changed its name to Red Hat, Inc. in June 1999. Red Hat, Inc. was founded in 1993 and is headquartered in Raleigh, North Carolina.
|Name:||Red Hat, Inc.|
|Market Cap:||$18,614 million|
100 East Davie Street, Raleigh, 27601, United States
Red Hat employees.
|Sector:||Software and Services|