A Look At The Intrinsic Value Of Advantage Solutions Inc. (NASDAQ:ADV)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Advantage Solutions fair value estimate is US$1.61
• Current share price of US$1.47 suggests Advantage Solutions is potentially trading close to its fair value
• Our fair value estimate is 60% lower than Advantage Solutions' analyst price target of US$4.00

In this article we are going to estimate the intrinsic value of Advantage Solutions Inc. (NASDAQ:ADV) by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

Our free stock report includes 1 warning sign investors should be aware of before investing in Advantage Solutions. Read for free now.

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. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last 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) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF ($, Millions)	US$49.9m	US$49.2m	US$49.2m	US$49.6m	US$50.3m	US$51.2m	US$52.2m	US$53.4m	US$54.7m	US$56.1m
Growth Rate Estimate Source	Est @ -2.99%	Est @ -1.27%	Est @ -0.06%	Est @ 0.78%	Est @ 1.37%	Est @ 1.78%	Est @ 2.07%	Est @ 2.28%	Est @ 2.42%	Est @ 2.52%
Present Value ($, Millions) Discounted @ 11%	US$44.8	US$39.7	US$35.6	US$32.2	US$29.3	US$26.8	US$24.5	US$22.5	US$20.7	US$19.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$295m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.8%) 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 11%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = US$56m× (1 + 2.8%) ÷ (11%– 2.8%) = US$665m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$665m÷ ( 1 + 11%)¹⁰= US$226m

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$521m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$1.5, the company appears about fair value at a 8.7% 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

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 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 Advantage Solutions 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 2.000. 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.

See our latest analysis for Advantage Solutions

SWOT Analysis for Advantage Solutions

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for 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. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Advantage Solutions, we've compiled three fundamental factors you should consider:

1. Risks: You should be aware of the 1 warning sign for Advantage Solutions we've uncovered before considering an investment in the company.
2. Future Earnings: How does ADV'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

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.

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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.