Dayforce's estimated fair value is US$53.86 based on 2 Stage Free Cash Flow to Equity
With US$51.08 share price, Dayforce appears to be trading close to its estimated fair value
Analyst price target for DAY is US$69.08, which is 28% above our fair value estimate
Today we will run through one way of estimating the intrinsic value of Dayforce Inc. (NYSE:DAY) by estimating the company's future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
What's The Estimated Valuation?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$244.2m
US$280.4m
US$307.3m
US$330.3m
US$350.1m
US$367.4m
US$382.9m
US$397.1m
US$410.3m
US$423.0m
Growth Rate Estimate Source
Analyst x4
Analyst x2
Est @ 9.62%
Est @ 7.49%
Est @ 5.99%
Est @ 4.94%
Est @ 4.21%
Est @ 3.70%
Est @ 3.34%
Est @ 3.09%
Present Value ($, Millions) Discounted @ 6.4%
US$230
US$248
US$255
US$258
US$257
US$254
US$249
US$242
US$236
US$228
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$2.5b
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (2.5%) 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 6.4%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$11b÷ ( 1 + 6.4%)10= US$6.1b
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$8.5b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$51.1, the company appears about fair value at a 5.2% 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.
Important 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 Dayforce 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 6.4%, which is based on a levered beta of 0.937. 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 Dayforce
Strength
Net debt to equity ratio below 40%.
Balance sheet summary for DAY.
Weakness
Interest payments on debt are not well covered.
Shareholders have been diluted in the past year.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Current share price is below our estimate of fair value.
Threat
Debt is not well covered by operating cash flow.
Revenue is forecast to grow slower than 20% per year.
Is DAY well equipped to handle threats?
Looking Ahead:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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 Dayforce, we've compiled three additional elements you should further research:
Risks: You should be aware of the 1 warning sign for Dayforce we've uncovered before considering an investment in the company.
Future Earnings: How does DAY'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 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.
主要见解
据 2 阶段自由现金流估算,Dayforce 的估值为 US$53.86。
以 US$51.08 的股价而言,Dayforce 的估值似乎接近其预估值。
分析师对 DAY 的目标价为 US$69.08,比我们的公允价值估计高 28%。
今天我们将通过估算公司未来的现金流并将其贴现到现在的价值来估算 Dayforce Inc. (NYSE:DAY) 的内在价值。我们将使用折现现金流模型(Discounted Cash Flow,DCF)来达到这个目的,这并不像您认为的那么难,从我们的例子中可以看出!
我们应该注意的是,估值的方法有很多种,就像DCF一样,每种技术在特定的情况下都有其优点和缺点。对于那些热爱股权分析的学习者来说,这里的 Simply Wall St 分析模型可能是一些感兴趣的内容。