Using the 2 Stage Free Cash Flow to Equity, Hilton Grand Vacations fair value estimate is US$61.09
Current share price of US$45.97 suggests Hilton Grand Vacations is potentially 25% undervalued
Our fair value estimate is 11% higher than Hilton Grand Vacations' analyst price target of US$55.13
How far off is Hilton Grand Vacations Inc. (NYSE:HGV) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$499.4m
US$544.1m
US$540.2m
US$541.2m
US$545.6m
US$552.5m
US$561.2m
US$571.2m
US$582.3m
US$594.1m
Growth Rate Estimate Source
Analyst x1
Analyst x1
Est @ -0.72%
Est @ 0.19%
Est @ 0.82%
Est @ 1.26%
Est @ 1.57%
Est @ 1.78%
Est @ 1.94%
Est @ 2.04%
Present Value ($, Millions) Discounted @ 10%
US$454
US$450
US$406
US$370
US$339
US$312
US$288
US$266
US$247
US$229
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$3.4b
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 (2.3%) 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 10%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$7.9b÷ ( 1 + 10%)10= US$3.0b
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$6.4b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of US$46.0, the company appears a touch undervalued at a 25% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Hilton Grand Vacations 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 10%, which is based on a levered beta of 1.676. 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 Hilton Grand Vacations
Strength
Debt is well covered by earnings.
Balance sheet summary for HGV.
Weakness
Earnings declined over the past year.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Good value based on P/E ratio and estimated fair value.
Threat
Debt is not well covered by operating cash flow.
Revenue is forecast to grow slower than 20% per year.
Is HGV well equipped to handle threats?
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching 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. Why is the intrinsic value higher than the current share price? For Hilton Grand Vacations, we've put together three pertinent items you should explore:
Risks: Be aware that Hilton Grand Vacations is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...
Future Earnings: How does HGV'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 NYSE 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.
上記の計算は、割引率とキャッシュフローの2つの前提条件に非常に依存しています。第1に、割引率、第2に、キャッシュフローです。これらの結果に同意しない場合は、計算を自分で行い、前提条件を変更することができます。DCFは、業界の可能性のある循環性や、企業の将来的な資本要件を考慮していないため、企業の潜在的なパフォーマンスの完全な写真を提供しません。私たちは、Hilton Grand Vacations社を潜在的な株主として見ているため、割引率として株式コストが使用されますが、これは債務を考慮に入れた資本コスト(加重平均資本コスト、WACC)ではなく、より適切です。この計算では、1.676のレバレッジされたベータを基にして10%を使用しています。ベータは、株価全体に対する市場のボラティリティの指標です。これは、業界全体の平均ベータをグローバルな比較可能企業から得て、0.8から2.0の範囲に制限を設けたものです。
前提条件
上記の計算は、割引率とキャッシュフローの2つの前提条件に非常に依存しています。第1に、割引率、第2に、キャッシュフローです。これらの結果に同意しない場合は、計算を自分で行い、前提条件を変更することができます。DCFは、業界の可能性のある循環性や、企業の将来的な資本要件を考慮していないため、企業の潜在的なパフォーマンスの完全な写真を提供しません。私たちは、Hilton Grand Vacations社を潜在的な株主として見ているため、割引率として株式コストが使用されますが、これは債務を考慮に入れた資本コスト(加重平均資本コスト、WACC)ではなく、より適切です。この計算では、1.676のレバレッジされたベータを基にして10%を使用しています。ベータは、株価全体に対する市場のボラティリティの指標です。これは、業界全体の平均ベータをグローバルな比較可能企業から得て、0.8から2.0の範囲に制限を設けたものです。
ヒルトングランドバケーションズのSWOT分析
強み
収益によって債務を十分にカバーしています。
HGVの財務状況の要約。
弱み
過去1年間の収益は減少しました。
機会
年間収益は、アメリカ市場よりも急速に成長する予定です。
P/E比率と推定公正価値に基づいて良いバリューです。
脅威
運営キャッシュフローで債務は十分にカバーされていません。
売上高は年間20%未満のペースで成長する予定です。
HGVは脅威に対応するために十分な装備を持っていますか?
次に進みましょう:
企業の評価は重要ですが、会社の調査をするときに見るべき指標はそれだけではありません。DCFモデルでは完全な評価は得られません。異なるケースと仮定を適用し、会社の評価にどのように影響するかを調べる必要があります。例えば、ターミナルバリュー成長率をわずかに調整するだけで、全体的な結果が劇的に変わることがあります。なぜ内的価値が現在の株価より高いのでしょうか?Hilton Grand Vacationsについて、探求すべき3つの重要なアイテムを用意しました:
リスク: Hilton Grand Vacationsは、投資分析において2つの警告サインを示しており、そのうちの1つは私たちを少し不安にさせています...