Does Check Point Software Technologies Ltd.’s (NASDAQ:CHKP) December stock price reflect its true value? Estimate the intrinsic value of This is done using the discounted cash flow (DCF) model. Believe it or not, as this example shows, it’s not that hard to understand!
It is worth pointing out that the DCF is not perfect for all situations, as companies may be assessed in different ways. If you want to learn a little more about intrinsic value, you might want to read the Simply Wall St analytical model.
Read the latest analysis from Check Point Software Technologies.
Calculation step by step
As the name suggests, we use a two-stage DCF model that considers two stages of growth. The first stage is generally a period of high growth that levels off towards the closing price captured in the second “steady growth” period. First, we need to get an estimate of cash flow for the next 10 years. We use analyst estimates when available, but if these are not available, we extrapolate previous free cash flow (FCF) from previous estimates or reported values. Over this period, we expect companies with shrinking free cash flow to contract at a slower rate, and those with growing free cash flow to see slower growth. This is to reflect that growth tends to slow in the early years rather than in later years.
In general, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to get an estimate of present value.
10-Year Free Cash Flow (FCF) Estimate
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
| Leverage FCF ($, million) | $1.21 billion | $1.24 billion | $1.24 billion | $1.2 billion | $1.21 billion | $1.22 billion | $1.24 billion | $1.26 billion | $1.28 billion | $1.31 billion |
| growth rate source | Analyst x13 | 7 analysts | Est @ 0.28% | Analyst x 1 | Est @ 0.79% | estimated @ 1.15% | Est @ 1.40% | estimated @ 1.57% | estimated @ 1.69% | estimated @ 1.78% |
| Present Value ($, Millions) Discount @ 8.4% | $1.1 million | $1.1 million | $975 | $871 | $810 | $756 | $707 | $663 | $622 | $585 |
(“Est” = FCF growth rate estimated by Simply Wall St)
10-Year Present Value of Cash Flows (PVCF) = US$8.2 billion
The second stage, also called terminal value, is the cash flow of the business after the first stage. A very conservative growth rate is used that cannot exceed the country’s GDP growth rate for a number of reasons. In this case, we used the 5-year average of 10-year government bond yields (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value using a cost of equity of 8.4%.
Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$1.3 billion × (1 + 2.0%) ÷ (8.4% – 2.0%) = US$21 billion
Present Value of Terminal Value (PVTV)= television / (1 + r)Ten= US$21 billion ÷ ( 1 + 8.4%)Ten= US$9.3 billion
The total value is the sum of the cash flows over the next 10 years plus the discounted terminal value, which is the total asset value, in this case US$17 billion. The final step is to divide the stock value by the number of outstanding shares. Compared to the current stock price of $126, the company’s fair value appears to be 9.6% cheaper than the current stock price. However, evaluation is an imprecise tool, like a telescope. Move a few degrees and you’ll end up in another galaxy. Remember this.
Assumption
The above calculation relies heavily on two assumptions. One is discount rate and the other is cash flow. If you disagree with these results, do the math yourself and play around with the assumptions. The DCF also does not give a complete picture of a company’s potential performance, as it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that Check Point Software Technologies is viewed as a potential shareholder, the cost of capital is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) that accounts for the liability. For this calculation, we used 8.4% based on a leverage beta of 0.985. Beta is a measure of a stock’s volatility relative to the market as a whole. Our betas are derived from industry average betas of globally comparable companies and are capped between 0.8 and 2.0. This is a reasonable range for a stable business.
SWOT Analysis of Check Point Software Technologies
- Revenue has declined over the past year.
- Annual revenue is projected to increase over the next three years.
- Good value based on P/E ratio and estimated fair value.
- Annual revenue is projected to grow more slowly than the US market.
Future plans:
Valuations are just one aspect of the coin when it comes to making investment papers, and ideally aren’t the only analytical factor that scrutinizes a company. A DCF model cannot give foolproof estimates. If possible, apply different cases and assumptions to see how they affect your company’s valuation. If companies grow at different rates, or if their cost of capital or risk-free rates change abruptly, their outputs can look very different. For Check Point Software Technologies, three related factors should be investigated:
- financial soundness: Is CHKP’s balance sheet healthy? Check out our free balance sheet analysis including 6 quick checks on key factors like leverage and risk.
- future earnings: How does CHKP’s growth rate compare to its peers and the wider market? Manipulate our free analyst growth forecast charts to dig deeper into analyst consensus numbers for the next few years.
- Other quality alternatives: Do you like all-rounders? Explore our interactive list of high-quality stocks to find out what else you may be missing!
PS. Simply Wall St updates his DCF calculations for all US stocks daily, so if you want to know the intrinsic value of other stocks, search here.
Valuation is complicated, but we’re here to help make it simple.
find out if Check Point Software Technology You may be overestimated or underestimated by checking out our comprehensive analysis including: Fair value estimates, risks and warnings, dividends, insider trading and financial health.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Is not …
