The projected fair value for BJ's Wholesale Club Holdings is US$127 based on 2 Stage Free Cash Flow to Equity
BJ's Wholesale Club Holdings is estimated to be 31% undervalued based on current share price of US$87.96
Analyst price target for BJ is US$87.17 which is 31% below our fair value estimate
In this article we are going to estimate the intrinsic value of BJ's Wholesale Club Holdings, Inc. (NYSE:BJ) by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$284.7m
US$375.0m
US$487.2m
US$512.5m
US$601.7m
US$666.1m
US$720.8m
US$767.4m
US$807.6m
US$842.9m
Growth Rate Estimate Source
Analyst x4
Analyst x5
Analyst x2
Analyst x2
Analyst x2
Est @ 10.71%
Est @ 8.21%
Est @ 6.46%
Est @ 5.24%
Est @ 4.38%
Present Value ($, Millions) Discounted @ 6.1%
US$268
US$333
US$407
US$404
US$447
US$466
US$475
US$477
US$472
US$465
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$4.2b
The second stage is also known as Terminal Value, this is the business's cash flow after 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 (2.4%) 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 6.1%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$23b÷ ( 1 + 6.1%)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$17b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$88.0, the company appears quite undervalued at a 31% 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:BJ Discounted Cash Flow July 30th 2024
Important Assumptions
We would point out that 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 BJ's Wholesale Club 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 6.1%, which is based on a levered beta of 0.817. 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 BJ's Wholesale Club Holdings
Strength
Debt is well covered by earnings and cashflows.
Balance sheet summary for BJ.
Weakness
Earnings growth over the past year underperformed the Consumer Retailing industry.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Trading below our estimate of fair value by more than 20%.
Threat
Annual earnings are forecast to grow slower than the American market.
What else are analysts forecasting for BJ?
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. 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. Can we work out why the company is trading at a discount to intrinsic value? For BJ's Wholesale Club Holdings, there are three essential factors you should consider:
Risks: To that end, you should be aware of the 2 warning signs we've spotted with BJ's Wholesale Club Holdings .
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for BJ's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
主要見解
基於2階段自由現金流估值法,BJ’s Wholesale Club Holdings的預期公允價值爲127美元。
基於目前美股87.96美元的股價,BJ’s Wholesale Club Holdings的估值低估了31%。
BJ的分析師目標價爲87.17美元,低於我們估算的公允價值31%。
本文將應用折現現金流(DCF)模型,通過預測未來現金流,折現至今天的價值,來估算BJ’s Wholesale Club Holdings,Inc. (紐交所:BJ)的內在價值。儘管這種方法看起來非常複雜,但實際上並不那麼難。
我們應該注意的是,估值的方法有很多種,就像DCF一樣,每種技術在特定的情況下都有其優點和缺點。對於那些熱愛股權分析的學習者來說,這裏的 Simply Wall St 分析模型可能是一些感興趣的內容。
公司未來十年的現金流與折現終值還原的總和組成了BJ’s Wholesale Club Holdings的總市值,在本例中爲170億美元。最後,我們將股本市值除以公司的實際股數得到每股目標價,與目前美股88.0美元的股價相比較,該公司看起來非常低估——折價31%。當然,估值的假設具有很大影響,所以這只是一個大致估算,不能精確到最後一分錢。
紐交所:BJ 折現現金流 2024年7月30日
重要假設
折現現金流的最重要的輸入變量是貼現率,當然也要考慮實際現金流。股票投資的一部分,就是要對公司的未來業績進行自己的評估,所以請自己動手計算,檢查自己的假設。DCF還不考慮行業的週期性,或公司未來的資本要求,因此不能很好地反映公司的潛在業績。鑑於我們正在考慮BJ’s Wholesale Club Holdings作爲潛在投資者,利用權益資本成本作爲貼現率,而非債務成本(或加權平均資本成本,WACC)考慮貼現率。在本計算中,我們使用6.1%的費用,這是基於0.817的偏離貝塔值計算的。Beta是衡量股票波動性的一項指標,與整個市場相比。我們從全球可比公司的行業平均beta值中得到我們的貝塔值,在0.8到2.0之間設定一個合理的範圍,對於一個穩定的企業而言是可以接受的。