Yahoo Finance The KeyW Holding Corporation (NASDAQ:KEYW) Investors Are Paying Above The Intrinsic Value
How far off is The KeyW Holding Corporation (NASDAQ:KEYW) 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 May 2018 then I highly recommend you check out the latest calculation for KeyW Holding here.
Crunching the numbers
I’ve used the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I use the analyst consensus forecast of KEYW’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 11.95%. 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 US$107.89M. Keen to know how I calculated this value? Read our detailed analysis here.
In the visual above, we see how how KEYW’s earnings are expected to move going forward, which should give you some color on KEYW’s outlook. Next, I calculate the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable 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. After discounting the terminal value back five years, the present value becomes US$243.05M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$350.95M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $7.12, which, compared to the current share price of $9.44, we find that KeyW Holding is quite expensive 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 KEYW, I’ve compiled three relevant factors you should further examine:
Financial Health: Does KEYW 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 KEYW’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 KEYW? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
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.
