Adtalem Global Education's estimated fair value is US$65.63 based on 2 Stage Free Cash Flow to Equity
Current share price of US$65.95 suggests Adtalem Global Education is potentially trading close to its fair value
The US$68.33 analyst price target for ATGE is 4.1% more than our estimate of fair value
In this article we are going to estimate the intrinsic value of Adtalem Global Education Inc. (NYSE:ATGE) by projecting its future cash flows and then discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Crunching The Numbers
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$190.3m
US$187.3m
US$156.9m
US$140.2m
US$130.8m
US$125.5m
US$122.9m
US$122.0m
US$122.2m
US$123.3m
Growth Rate Estimate Source
Analyst x1
Analyst x1
Est @ -16.23%
Est @ -10.64%
Est @ -6.74%
Est @ -4.00%
Est @ -2.09%
Est @ -0.75%
Est @ 0.19%
Est @ 0.85%
Present Value ($, Millions) Discounted @ 6.9%
US$178
US$164
US$128
US$107
US$93.7
US$84.1
US$77.1
US$71.5
US$67.1
US$63.3
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$1.0b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 6.9%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.8b÷ ( 1 + 6.9%)10= US$1.4b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$2.5b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$66.0, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Important Assumptions
We would point out that 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 these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Adtalem Global Education as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.9%, which is based on a levered beta of 0.982. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
SWOT Analysis for Adtalem Global Education
Strength
Earnings growth over the past year exceeded the industry.
Debt is not viewed as a risk.
Balance sheet summary for ATGE.
Weakness
No major weaknesses identified for ATGE.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
Annual revenue is forecast to grow slower than the American market.
What else are analysts forecasting for ATGE?
Next Steps:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Adtalem Global Education, there are three pertinent aspects you should further examine:
Risks: Take risks, for example - Adtalem Global Education has 1 warning sign we think you should be aware of.
Future Earnings: How does ATGE'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: Do you like a good all-rounder? 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 valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
主要見解
根據2階段自由現金流股本法,Adtalem Global Education的估值爲65.63美元。
Adtalem Global Education當前的股價65.95美元表明其潛在接近公允價值。
ATGE的目標價格爲68.33美元,比我們的公允價值估計高出4.1%。
本文將通過預測Adtalem Global Education Inc. (紐交所:ATGE) 的未來現金流並將其折現至今天的價值來估算其內在價值,可以使用貼現現金流量模型(DCF)。聽起來很複雜,但其實很簡單!
我們指出,折現現金流的最重要輸入是折現率和實際現金流。您不必同意這些輸入,我建議您重新計算並與它們玩耍。DCF還不考慮行業的可能週期性或公司未來的資本需求,因此它不能給出公司潛在績效的完整圖片。鑑於我們正在着眼於Adtalem Global Education公司作爲潛在股東,因此使用權益成本作爲折現率,而不是計算負債的成本(或加權平均成本資本,WACC)。在此計算中,我們使用了6.9%,該數字基於槓桿β值爲0.982。Beta是股票相對於整個市場的波動性度量。我們從全球可比公司的行業平均Beta中獲得我們的Beta,強制限制在0.8到2.0之間,這是一個穩定企業的合理範圍。