Yahoo Finance A Look At The Fair Value Of H&R Block Inc (NYSE:HRB)
Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of H&R Block Inc (NYSE:HRB) as an investment opportunity by estimating the company’s future cash flows and discounting them to their present value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not December 2018 then I highly recommend you check out the latest calculation for H&R Block by following the link below.
Check out our latest analysis for H&R Block
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. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow estimate
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF ($, Millions) | $449.23 | $549.90 | $543.80 | $549.87 | $556.01 |
Source | Analyst x3 | Analyst x2 | Analyst x1 | Est @ 1.12% | Est @ 1.12% |
Present Value Discounted @ 11.3% | $403.61 | $443.87 | $394.37 | $358.27 | $325.48 |
Present Value of 5-year Cash Flow (PVCF)= US$1.9b
After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 11.3%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$556m × (1 + 2.9%) ÷ (11.3% – 2.9%) = US$6.9b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$6.9b ÷ ( 1 + 11.3%)5 = US$4.0b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$5.9b. 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 $28.88. Relative to the current share price of $27.52, the stock is about right, perhaps slightly undervalued at a 4.7% discount to what it is available for right now.
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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at H&R Block 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 11.3%, which is based on a levered beta of 1.185. 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:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. For HRB, there are three important factors you should further research:
Financial Health: Does HRB 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 HRB’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 HRB? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
