Stock Analysis
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- NasdaqGS:TCOM
Trip.com Group Limited's (NASDAQ:TCOM) Intrinsic Value Is Potentially 54% Above Its Share Price
Key Insights
- The projected fair value for Trip.com Group is US$64.97 based on 2 Stage Free Cash Flow to Equity
- Current share price of US$42.18 suggests Trip.com Group is potentially 35% undervalued
- Analyst price target for TCOM is CN¥66.01, which is 1.6% above our fair value estimate
In this article we are going to estimate the intrinsic value of Trip.com Group Limited (NASDAQ:TCOM) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. 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 Trip.com Group
Step By Step Through The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF (CN¥, Millions) | CN¥15.1b | CN¥16.9b | CN¥17.9b | CN¥17.6b | CN¥17.6b | CN¥17.7b | CN¥17.9b | CN¥18.2b | CN¥18.6b | CN¥19.0b |
Growth Rate Estimate Source | Analyst x7 | Analyst x6 | Analyst x3 | Analyst x2 | Est @ -0.15% | Est @ 0.64% | Est @ 1.20% | Est @ 1.59% | Est @ 1.86% | Est @ 2.05% |
Present Value (CN¥, Millions) Discounted @ 7.6% | CN¥14.0k | CN¥14.6k | CN¥14.4k | CN¥13.2k | CN¥12.2k | CN¥11.4k | CN¥10.7k | CN¥10.1k | CN¥9.6k | CN¥9.1k |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥119b
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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 7.6%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = CN¥19b× (1 + 2.5%) ÷ (7.6%– 2.5%) = CN¥379b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥379b÷ ( 1 + 7.6%)10= CN¥182b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥301b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$42.2, the company appears quite good value at a 35% 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.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Trip.com Group 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 7.6%, which is based on a levered beta of 1.243. 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 Trip.com Group
- Earnings growth over the past year exceeded the industry.
- Debt is not viewed as a risk.
- No major weaknesses identified for TCOM.
- Annual revenue is forecast to grow faster than the American market.
- Good value based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow slower than the American market.
Moving On:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a discount to intrinsic value? For Trip.com Group, we've compiled three important aspects you should explore:
- Financial Health: Does TCOM have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
- Future Earnings: How does TCOM'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. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Valuation is complex, but we're here to simplify it.
Discover if Trip.com Group might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.
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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.
About NasdaqGS:TCOM
Trip.com Group
Through its subsidiaries, operates as a travel service provider for accommodation reservation, transportation ticketing, packaged tours and in-destination, corporate travel management, and other travel-related services in China and internationally.