The projected fair value for Cable One is US$380 based on 2 Stage Free Cash Flow to Equity
Cable One's US$356 share price indicates it is trading at similar levels as its fair value estimate
Analyst price target for CABO is US$491, which is 29% above our fair value estimate
How far off is Cable One, Inc. (NYSE:CABO) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Method
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$294.7m
US$158.1m
US$148.7m
US$146.3m
US$145.9m
US$146.7m
US$148.4m
US$150.7m
US$153.5m
US$156.6m
Growth Rate Estimate Source
Analyst x6
Analyst x2
Analyst x2
Analyst x2
Est @ -0.28%
Est @ 0.55%
Est @ 1.14%
Est @ 1.55%
Est @ 1.83%
Est @ 2.03%
Present Value ($, Millions) Discounted @ 9.0%
US$270
US$133
US$115
US$104
US$94.8
US$87.4
US$81.1
US$75.5
US$70.6
US$66.0
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$1.1b
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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 9.0%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.5b÷ ( 1 + 9.0%)10= US$1.0b
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$2.1b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$356, the company appears about fair value at a 6.4% 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. 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 Cable One 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 9.0%, which is based on a levered beta of 1.581. 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 Cable One
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings.
Dividends are covered by earnings and cash flows.
Dividend information for CABO.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Media market.
Opportunity
Good value based on P/E ratio and estimated fair value.
Significant insider buying over the past 3 months.
Threat
Debt is not well covered by operating cash flow.
Annual earnings are forecast to decline for the next 3 years.
Is CABO well equipped to handle threats?
Moving On:
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. 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 Cable One, we've put together three further aspects you should look at:
Risks: Case in point, we've spotted 3 warning signs for Cable One you should be aware of, and 2 of them shouldn't be ignored.
Future Earnings: How does CABO'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. 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.
主要见解
基于2阶段自由现金流对Cable One的预期公允价值为380美元。
Cable One的356美元股价表明其交易水平与其公允值估计相似。
CABO的分析师价值目标为491美元,比我们的公允价值估计高29%。
Cable One, Inc. (NYSE:CABO)与其内在价值差距有多大?通过使用最近的财务数据,我们将以预期的未来现金流并将它们折现为现值的方式来判断该股票的价值是否合理。我们将采用贴现现金流 (DCF)模型来完成这项工作。不管你是否相信,它并不太难,接下来你将会从我们的例子中看到!