How far off is Wynn Resorts Limited (NASDAQ:WYNN) to its intrinsic value? Using the most recent financial data, I am going to take a look now using a method called discounted cash flow or DCF. Discounted Cash Flow or DCF is a direct valuation technique that values a company by projecting its future cash flows and then discounting them to todays money. Don’t get put off by the jargon, the math behind it is actually quite straightforward.Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in October 2017 so be sure check out the updated calculation by following the link below. View our latest analysis for Wynn Resorts
I use what is known as a 2-stage model, which simply means we have two different periods where we need to estimate cash flows. In the 1st stage we need to estimate the cash flows to the business over the next 5 years, where possible I use analysts estimates but when these aren’t available I have extrapolated the previous Free Cash Flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past 5 years, but capped to a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.
Please note that the numbers here are in millions apart from the per share values.
5-year cash flow forecast
|Levered FCF (USD, Millions)||$975.30||$813.32||$1,095.10||$1,291.90||$1,229.51|
|Source||Analyst x3||Analyst x6||Analyst x2||Analyst x2||Extrapolated @ (-4.83%)|
|Present Value Discounted @ 13.21%||$861.50||$634.59||$754.76||$786.50||$661.18|
Present value of next 5 years cash flows: $3,699
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the 5 years. For a number of reasons a very conservative rate is used that cannot exceed that of the GDP. In this case I have used the 10 year government bond rate (2.5%). In the same way as with the 5 year ‘growth’ period we discount this to today’s value.
Terminal Value = FCF2021 × (1 + g) ÷ (Discount Rate – g)
Terminal Value = $1,230 × (1 + 2.5%) ÷ (13.2% – 2.5%)
Terminal value based on the Perpetuity Method where growth (g) = 2.5%: $11,731
Present value of terminal value: $6,309
The total value or equity value is then the sum of of the present value of the cash flows.
Equity Value (Total value) = Present value of next 5 years cash flows + terminal value = $3,699 + $6,309 = $10,007
In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number.
Value = Total value / Shares Outstanding ($10,007.19 / 102.57)
Finally if we compare the intrinsic value of $97.56 to the current share price of $142.33 we see Wynn Resorts (NasdaqGS:WYNN) is rather overvalued at the time of writing.
Now 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Wynn Resorts as potential investors the Cost of Equity is used as the discount rate, not the Cost of Capital (or Weighed Average Cost of Capital/ WACC) which accounts for debt.
In this calculation I’ve used 13.2% and this is based on a Levered Beta of 1.426. I’m not going to go into how I calculate the Levered Beta in detail, I used the ‘Bottom up Beta’ method based on the comparable businesses, I also impose a limit between 0.8 and 2 which is a reasonable range for a stable business.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. Is Wynn Resorts in a healthy financial condition? What is the reason for the share price to differ from the intrinsic value? See our latest FREE analysis to find out!
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