TKO Group Holdings' estimated fair value is US$122 based on 2 Stage Free Cash Flow to Equity
With US$107 share price, TKO Group Holdings appears to be trading close to its estimated fair value
The US$117 analyst price target for TKO is 4.1% less than our estimate of fair value
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of TKO Group Holdings, Inc. (NYSE:TKO) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
Is TKO Group Holdings Fairly Valued?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$595.0m
US$908.1m
US$1.16b
US$1.21b
US$1.25b
US$1.28b
US$1.32b
US$1.35b
US$1.39b
US$1.42b
Growth Rate Estimate Source
Analyst x6
Analyst x6
Analyst x3
Analyst x1
Est @ 3.11%
Est @ 2.89%
Est @ 2.74%
Est @ 2.63%
Est @ 2.56%
Est @ 2.50%
Present Value ($, Millions) Discounted @ 7.7%
US$552
US$783
US$932
US$898
US$860
US$821
US$783
US$746
US$711
US$676
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$7.8b
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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 7.7%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$27b÷ ( 1 + 7.7%)10= US$13b
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$21b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$107, the company appears about fair value at a 12% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
NYSE:TKO Discounted Cash Flow June 14th 2024
The 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 TKO Group Holdings 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 7.7%, which is based on a levered beta of 1.160. 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 TKO Group Holdings
Strength
Net debt to equity ratio below 40%.
Balance sheet summary for TKO.
Weakness
Interest payments on debt are not well covered.
Opportunity
Expected to breakeven next year.
Has sufficient cash runway for more than 3 years based on current free cash flows.
Good value based on P/S ratio and estimated fair value.
Threat
Debt is not well covered by operating cash flow.
Is TKO well equipped to handle threats?
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For TKO Group Holdings, we've compiled three additional elements you should further examine:
Risks: Every company has them, and we've spotted 1 warning sign for TKO Group Holdings you should know about.
Future Earnings: How does TKO'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. 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.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
主要见解
基于二阶自由现金流到股权的估值,TKO Group Holdings的预估公允价值为122美元
以107美元的股价,TKO Group Holdings似乎正在接近其预测公允价值
对于TKO来说,分析师的117美元的价格目标比我们的公允价值估计少了4.1%
今天我们将通过一种估值方法来评估TKO Group Holdings, Inc. (NYSE:TKO)作为投资机会的吸引力,即采用预期未来现金流量并将其贴现至今天的价值。贴现现金流量(DCF)模型是我们将应用此方法的工具。不要因术语而放弃,其背后的数学实际上非常简单。
现在,贴现现金流的最重要输入是贴现率,以及实际现金流。您不必同意这些输入,我建议您重新计算并与它们玩耍。DCF模型也没有考虑行业的可能周期性,或公司未来的资本需求,因此它并不能全面地描述公司的潜在表现。鉴于我们看待TKO Group Holdings作为潜在的股东,所以使用的是股权成本而不是资本成本(或加权平均资本成本(WACC)考虑了债务)。在这个计算中,我们使用了7.7%,这是基于杠杆贝塔为1.160的计算。贝塔是衡量一支股票相对于整个市场的波动性的指标。我们从全球类似公司的行业平均贝塔值中获取贝塔值,设定一个介于0.8和2.0之间的范围,这是一个稳定业务的合理范围。
TKO Group Holdings SWOT分析
优势
净债务与所有者权益比率低于40%。
TKO资产负债表摘要。
弱势
债务利息支付能力不太好。
机会
预计明年盈亏相抵。
根据当前自由现金流,财务运营资金足够支撑三年以上。
根据市销率和估计的公平价值,TWKS的价值很好。
威胁
运营现金流无法很好地覆盖债务。
TKO准备好处理威胁了吗?
下一步:
估值只是建立投资论点的一面,当研究一家公司时,不应该只看估值。DCF模型并不是一个完美的股票估值工具。最好您应该应用不同的情况和假设,看看它们如何影响公司的估值。例如,公司股权成本或无风险利率的变化可能会显着影响估值。对于TKO Group Holdings,除了估值之外,我们还编制了另外三个您应该进一步检查的要素: