In this article I am going to calculate the intrinsic value of Stamps.com Inc. (NASDAQ:STMP) by taking the expected future cash flows and discounting them to their present value. I will be using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for Stamps.com by following the link below.
Check out our latest analysis for Stamps.com
Crunching the numbers
I’m using the 2-stage growth 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. 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 the sum of these cash flows to arrive at a present value estimate.
5-year cash flow forecast
| 2019 | 2020 | 2021 | 2022 | 2023 | |
| Levered FCF ($, Millions) | $233.12 | $263.44 | $310.85 | $363.70 | $421.89 |
| Source | Analyst x1 | Analyst x1 | Est @ 18%, capped from 32.7% | Est @ 17%, capped from 32.7% | Est @ 16%, capped from 32.7% |
| Present Value Discounted @ 15.5% | $201.84 | $197.47 | $201.75 | $204.37 | $205.25 |
Present Value of 5-year Cash Flow (PVCF)= US$1.0b
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. 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 (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 15.5%.
Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = US$422m × (1 + 2.9%) ÷ (15.5% – 2.9%) = US$3.5b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$3.5b ÷ ( 1 + 15.5%)5 = US$1.7b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$2.7b. 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 $148.85. Relative to the current share price of $155.32, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.