In this article I am going to calculate the intrinsic value of Guess’ Inc (NYSE:GES) using the discounted cash flows (DCF) model. 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 after December 2017 then I highly recommend you check out the latest calculation for Guess’ here.
Crunching the numbers
I use what is known as the 2-stage model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. To begin, I use the analyst consensus estimates of GES’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.49%. This resulted in a present value of 5-year cash flow of $187.7M. Keen to understand how I arrived at this number? Take a look at our detailed analysis here.
The graph above shows how GES’s top and bottom lines are expected to move going forward, which should give you an idea of GES’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of $916.6M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is $1,104.2M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $13.42, which, compared to the current share price of $16.25, we find that Guess’ is fair value, maybe slightly overvalued and not available at a discount at this time.
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 GES, I’ve compiled three fundamental aspects you should further research:
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 pass 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.