- United States
Golden Entertainment, Inc. (NASDAQ:GDEN) Shares Could Be 30% Below Their Intrinsic Value Estimate
- Using the 2 Stage Free Cash Flow to Equity, Golden Entertainment fair value estimate is US$60.78
- Golden Entertainment is estimated to be 30% undervalued based on current share price of US$42.53
- Analyst price target for GDEN is US$54.00 which is 11% below our fair value estimate
Today we will run through one way of estimating the intrinsic value of Golden Entertainment, Inc. (NASDAQ:GDEN) by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
Check out our latest analysis for Golden Entertainment
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
|Levered FCF ($, Millions)||US$236.9m||US$119.2m||US$157.0m||US$157.1m||US$158.1m||US$159.8m||US$162.1m||US$164.7m||US$167.6m||US$170.7m|
|Growth Rate Estimate Source||Analyst x4||Analyst x4||Analyst x1||Est @ 0.04%||Est @ 0.66%||Est @ 1.10%||Est @ 1.40%||Est @ 1.61%||Est @ 1.76%||Est @ 1.87%|
|Present Value ($, Millions) Discounted @ 11%||US$214||US$97.5||US$116||US$105||US$95.6||US$87.4||US$80.2||US$73.7||US$67.8||US$62.4|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.1%. We discount the terminal cash flows to today's value at a cost of equity of 11%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$171m× (1 + 2.1%) ÷ (11%– 2.1%) = US$2.1b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.1b÷ ( 1 + 11%)10= US$753m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$1.8b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$42.5, the company appears quite good value at a 30% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Golden Entertainment 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 accounts for debt. In this calculation we've used 11%, which is based on a levered beta of 1.426. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Golden Entertainment
- No major strengths identified for GDEN.
- Earnings declined over the past year.
- Interest payments on debt are not well covered.
- Annual earnings are forecast to grow faster than the American market.
- Trading below our estimate of fair value by more than 20%.
- Debt is not well covered by operating cash flow.
- Annual revenue is expected to decline over the next 3 years.
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Golden Entertainment, we've put together three important factors you should consider:
- Risks: Take risks, for example - Golden Entertainment has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.
- Future Earnings: How does GDEN's growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
- Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGM every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Golden Entertainment is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Golden Entertainment, Inc., together with its subsidiaries, engages in the ownership and operation of a diversified entertainment platform in the United States.
Slightly overvalued with limited growth.