Yahoo Finance Investors Are Undervaluing The Children’s Place, Inc. (NASDAQ:PLCE) By 38.63%
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In this article I am going to calculate the intrinsic value of The Children’s Place, Inc. (NASDAQ:PLCE) by taking the expected future cash flows and discounting them to their present value. I will use the Discounted Cash Flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in February 2019 so be sure check out the updated calculation by following the link below.
View our latest analysis for Children’s Place
The calculation
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow estimate
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF ($, Millions) | $102.00 | $134.00 | $174.00 | $177.70 | $181.48 |
Source | Analyst x1 | Analyst x1 | Analyst x1 | Est @ 2.13% | Est @ 2.13% |
Present Value Discounted @ 9.27% | $93.34 | $112.22 | $133.36 | $124.64 | $116.49 |
Present Value of 5-year Cash Flow (PVCF)= US$580m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.7%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 9.3%.
Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = US$181m × (1 + 2.7%) ÷ (9.3% – 2.7%) = US$2.8b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$2.8b ÷ ( 1 + 9.3%)5 = US$1.8b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$2.4b. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of $148.77. Compared to the current share price of $91.3, the stock is quite good value at a 39% discount to what it is available for right now.
The 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 my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Children’s Place as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9.3%, which is based on a levered beta of 0.900. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For PLCE, there are three key factors you should further research:
Financial Health: Does PLCE have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does PLCE’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: Are there other high quality stocks you could be holding instead of PLCE? 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 does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.
