Yahoo Finance Calculating The Fair Value Of Gray Television Inc (NYSE:GTN)
In this article I am going to calculate the intrinsic value of Gray Television Inc (NYSE:GTN) by taking the foreast future cash flows of the company and discounting them back to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. 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 June 2018 then I highly recommend you check out the latest calculation for Gray Television by following the link below. View out our latest analysis for Gray Television
What’s the value?
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. In the first stage we need to estimate the cash flows to the business over the next five years. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow forecast
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF ($, Millions) | $210.64 | $132.25 | $202.00 | $134.00 | $155.44 |
Source | Analyst x4 | Analyst x4 | Analyst x1 | Analyst x1 | Extrapolated @ (16%, capped from 21.41%) |
Present Value Discounted @ 16.36% | $181.02 | $97.67 | $128.21 | $73.09 | $72.86 |
Present Value of 5-year Cash Flow (PVCF)= US$552.85m
The second stage is also known as Terminal Value, this is the business’s cash flow after 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 16.4%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$155.44m × (1 + 2.9%) ÷ (16.4% – 2.9%) = US$1.19b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$1.19b ÷ ( 1 + 16.4%)5 = US$559.24m
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$1.11b. 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 $12.67. Relative to the current share price of $12.8, the stock is fair value, maybe slightly overvalued at the time of writing.
The assumptions
I’d like to 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Gray Television 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 16.4%, which is based on a levered beta of 1.903. 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:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For GTN, there are three relevant factors you should further research:
Financial Health: Does GTN 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 GTN’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 GTN? 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 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.
