Calculating The Intrinsic Value Of Consensus Cloud Solutions, Inc. (NASDAQ:CCSI)

April 03, 2023

Key Insights

Using the 2 Stage Free Cash Flow to Equity, Consensus Cloud Solutions fair value estimate is US$35.46
Consensus Cloud Solutions' US$34.09 share price indicates it is trading at similar levels as its fair value estimate
Analyst price target for CCSI is US$62.00, which is 75% above our fair value estimate

Does the April share price for Consensus Cloud Solutions, Inc. (NASDAQ:CCSI) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for Consensus Cloud Solutions

The Method

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. 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) estimate

2023202420252026202720282029203020312032 Levered FCF ($, Millions) US$67.0mUS$90.0mUS$82.0mUS$77.6mUS$75.2mUS$74.0mUS$73.7mUS$73.9mUS$74.5mUS$75.4mGrowth Rate Estimate SourceAnalyst x1Analyst x2Analyst x1Est @ -5.34%Est @ -3.12%Est @ -1.56%Est @ -0.47%Est @ 0.29%Est @ 0.83%Est @ 1.20% Present Value ($, Millions) Discounted @ 12% US$60.0US$72.1US$58.9US$49.9US$43.3US$38.2US$34.1US$30.6US$27.6US$25.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$440m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 12%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$75m× (1 + 2.1%) ÷ (12%– 2.1%) = US$803m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$803m÷ ( 1 + 12%)¹⁰= US$266m

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$706m. 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$34.1, the company appears about fair value at a 3.9% 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.

dcf — NasdaqGS:CCSI Discounted Cash Flow April 3rd 2023

Important Assumptions

Now 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 Consensus Cloud 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 12%, which is based on a levered beta of 1.614. 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 Consensus Cloud Solutions

Strength

No major strengths identified for CCSI.

Weakness

Earnings declined over the past year.

Interest payments on debt are not well covered.

Opportunity

Annual earnings are forecast to grow for the next 3 years.

Good value based on P/E ratio and estimated fair value.

Have CCSI insiders been buying lately?

Threat

Debt is not well covered by operating cash flow.

Total liabilities exceed total assets, which raises the risk of financial distress.

Annual earnings are forecast to grow slower than the American market.

Is CCSI well equipped to handle threats?

Next Steps:

Although the valuation of a company is important, it 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. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Consensus Cloud Solutions, there are three essential elements you should explore:

Risks: Take risks, for example - Consensus Cloud Solutions has 3 warning signs (and 2 which can't be ignored) we think you should know about.
Future Earnings: How does CCSI'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 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. 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.

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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.