How far off is Progress Software Corporation (NASDAQ:PRGS) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced 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 Progress Software here.
What’s the value?
I use what is known as the 2-stage model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off, I took the analyst consensus estimates of PRGS’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 9.36%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $439.0M. Keen to know how I calculated this value? Read our detailed analysis here.
Above is a visual representation of how PRGS’s earnings are expected to move going forward, which should give you some color on PRGS’s outlook. Secondly, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable 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 $1,201.8M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $1,640.8M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $34.32, which, compared to the current share price of $42.57, we find that Progress Software is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Although the valuation of a company is important, it 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 PRGS, I’ve compiled three essential aspects you should further research:
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.
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.