Booz Allen Hamilton Holding's estimated fair value is US$160 based on 2 Stage Free Cash Flow to Equity
Current share price of US$152 suggests Booz Allen Hamilton Holding is potentially trading close to its fair value
Our fair value estimate is 4.0% lower than Booz Allen Hamilton Holding's analyst price target of US$167
Does the June share price for Booz Allen Hamilton Holding Corporation (NYSE:BAH) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Step By Step Through The Calculation
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) forecast
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$179.2m
US$779.4m
US$905.6m
US$957.5m
US$998.7m
US$1.04b
US$1.07b
US$1.10b
US$1.13b
US$1.16b
Growth Rate Estimate Source
Analyst x6
Analyst x7
Analyst x6
Analyst x2
Est @ 4.31%
Est @ 3.73%
Est @ 3.32%
Est @ 3.04%
Est @ 2.84%
Est @ 2.70%
Present Value ($, Millions) Discounted @ 6.7%
US$168
US$684
US$745
US$739
US$722
US$702
US$680
US$656
US$632
US$609
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$6.3b
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 (2.4%) 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 6.7%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$28b÷ ( 1 + 6.7%)10= US$14b
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$21b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$152, the company appears about fair value at a 5.4% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
NYSE:BAH Discounted Cash Flow June 10th 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 Booz Allen Hamilton Holding 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 6.7%, which is based on a levered beta of 0.940. 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 Booz Allen Hamilton Holding
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings.
Balance sheet summary for BAH.
Weakness
Dividend is low compared to the top 25% of dividend payers in the Professional Services market.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Current share price is below our estimate of fair value.
Threat
Debt is not well covered by operating cash flow.
Dividends are not covered by cash flow.
Annual earnings are forecast to grow slower than the American market.
Is BAH well equipped to handle threats?
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Booz Allen Hamilton Holding, we've compiled three further factors you should look at:
Risks: Take risks, for example - Booz Allen Hamilton Holding has 1 warning sign we think you should be aware of.
Future Earnings: How does BAH'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
根据2阶段自由现金流到权益法,Booz Allen Hamilton Holding的估值为160美元。
当前的152美元的股价表明Booz Allen Hamilton Holding的股票已经接近其公允价值。
我们的公允价值估计比Booz Allen Hamilton Holding分析师的目标价167美元低4.0%。
6月份的Booz Allen Hamilton Holding Corporation (纽交所:BAH)的股价是否反映了其真正的价值?今天,我们将通过把未来的现金流折现到现值的方式来估算这只股票的内在价值,使用的方法是折现现金流(DCF)模型。你将会从我们的实例中了解到,信不信由你,这并不是太难。
现金流折现最重要的输入因素是折现率,当然还有实际现金流。你不必同意这些输入,我建议你重新计算并进行调整。DCF模型也不考虑行业的可能周期变动或公司未来的资本需求,因此它不能全面反映公司的潜在业绩。考虑到我们正在考虑Booz Allen Hamilton Holding作为潜在股东,因此使用的是权益成本作为折现率,而不是资本成本(或加权平均资本成本,WACC),后者考虑了债务因素。在本次计算中,我们使用了6.7%,这是基于0.940的杠杆beta得出的。Beta是衡量一只股票相对于整个市场波动性的指标。我们从全球可比公司的行业平均beta值中得到我们的beta值,限制范围在0.8和2.0之间,这是一个稳健业务的合理范围。
Booz Allen Hamilton Holding SWOT分析
优势
去年盈利增长超过了行业平均水平。
债务被收益覆盖良好。
BAH资产负债表摘要。
弱点
与专业服务市场前25%的股息支付者相比,股息较低。
机会
预计未来3年的年度收益将增长。
当前股价低于我们估计的公平价值。
威胁
运营现金流无法很好地覆盖债务。
股息不被现金流覆盖。
预计年度收益增长速度将慢于美国市场。
BAH是否准备好应对威胁?
下一步:
在构建您的投资论点方面,估值只是其中的一面,也是您需要评估公司的许多因素之一。DCF模型并不是一种完美的股票估值工具,它应该被视为一种指导,了解“这只股票是否被低估/高估所需的假设是什么?”例如,如果调整终端价值增长率,它可以大大改变整体结果。对于Booz Allen Hamilton Holding,我们编制了另外三个因素,您应该查看:
风险:承担风险,例如——Booz Allen Hamilton Holding拥有1个警示信号,我们认为您应该知道。