Calculating The Intrinsic Value Of Cross Country Healthcare, Inc. (NASDAQ:CCRN)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Cross Country Healthcare fair value estimate is US$21.93
• With US$20.27 share price, Cross Country Healthcare appears to be trading close to its estimated fair value
• The US$22.50 analyst price target for CCRN is 2.6% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Cross Country Healthcare, Inc. (NASDAQ:CCRN) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

Check out our latest analysis for Cross Country Healthcare

The Model

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) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF ($, Millions)	US$73.9m	US$53.2m	US$42.3m	US$36.6m	US$33.3m	US$31.5m	US$30.5m	US$30.1m	US$29.9m	US$30.1m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ -20.39%	Est @ -13.58%	Est @ -8.82%	Est @ -5.49%	Est @ -3.15%	Est @ -1.52%	Est @ -0.38%	Est @ 0.42%
Present Value ($, Millions) Discounted @ 6.0%	US$69.8	US$47.3	US$35.6	US$29.0	US$25.0	US$22.3	US$20.3	US$18.9	US$17.8	US$16.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$303m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.0%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$30m× (1 + 2.3%) ÷ (6.0%– 2.3%) = US$836m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$836m÷ ( 1 + 6.0%)¹⁰= US$468m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$771m. 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$20.3, the company appears about fair value at a 7.6% 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

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. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Cross Country Healthcare 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 6.0%, which is based on a levered beta of 0.800. 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 Cross Country Healthcare

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Cross Country Healthcare, we've compiled three further aspects you should look at:

1. Risks: We feel that you should assess the 3 warning signs for Cross Country Healthcare (1 is a bit concerning!) we've flagged before making an investment in the company.
2. Future Earnings: How does CCRN'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.
3. 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 NASDAQGS every day. If you want to find the calculation for other stocks just search here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.