- The estimated fair value of One Software Technologies is ₪53.3 based on two-stage free cash flow to equity.
- The current stock price is ₪46.6, suggesting that One Software Technologies is trading near fair value.
- One Software Technologies peers are now Trade at an average premium of 106%
One Software Technologies Ltd (TLV:ONE) from the intrinsic value? Using the latest financial data, get the expected future cash flows and discount them to present value to find out if the stock price is fair. This is done using the discounted cash flow (DCF) model. Don’t let the jargon fool you. The math behind it is actually pretty simple.
A company’s value is generally considered to be the present value of all future cash generated by the company. However, DCF is just one of many metrics and it is not without its flaws. If you want to learn a little more about intrinsic values, Simply the Wall St analysis model.
See the latest analysis from One Software Technologies
Is One Software Technologies evaluated fairly?
We use a two stage growth model. This simply means taking into account his two phases of the company’s growth. In the early stage, the company may have a high growth rate, and it is usually assumed that there is a steady growth rate in the second stage. First, we need to get an estimate of cash flow for the next 10 years. Prior Free Cash Flow (FCF) was extrapolated from the company’s latest reported figures as analyst estimates of free cash flow are not available. 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.
DCF is based on the idea that future dollars are worth less than current dollars, so the sum of these future cash flows must be discounted to arrive at a present value estimate.
10-Year Free Cash Flow (FCF) Forecast
|Leverage FCF (₪, Millions)||₪276.8m||₪284.5m||₪291.3m||₪297.5m||₪303.3m||₪308.8m||₪314.2m||₪319.4m||₪324.6m||₪329.8m|
|growth rate source||Est @ 3.31%||estimated @ 2.77%||Est @ 2.40%||estimated @ 2.13%||estimated @ 1.95%||estimated @ 1.82%||estimated @ 1.73%||estimated @ 1.67%||estimated @ 1.62%||Est @ 1.59%|
|Present Value (₪, Million) Discount @ 9.0%||₪254||₪239||₪225||₪211||₪197||₪184||₪172||₪160||₪150||₪139|
(“Est” = FCF growth rate estimated by Simply Wall St)
10-Year Present Value of Cash Flows (PVCF) = ₪1.9b
The second stage, also called terminal value, is the cash flow of the business after the first stage. The Gordon Growth formula is used to calculate terminal value at future annual growth rates equal to his 5-year average of 1.5% for 10-year Treasury yields. Discount the final cash flows to their present value at a 9.0% cost of capital.
Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = ₪330m× (1 + 1.5%) ÷ (9.0%– 1.5%) = ₪4.5b
Present Value of Terminal Value (PVTV)= television / (1 + r)Ten= ₪4.5b÷(1 + 9.0%)Ten= ₪1.9b
Total value, or equity value, is the sum of the present value of future cash flows, in this case ₪3.8b. The final step is to divide the stock value by the number of outstanding shares. At its current share price of ₪46.6, the company’s fair value appears to be 13% cheaper than its current share price. But remember that this is a rough estimate, garbage in, garbage out, just like any complex expression.
The most important input to discounted cash flows is the discount rate and, of course, the actual cash flows. Part of investing is also self-evaluating the company’s future performance. So try the calculations yourself and check your 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 we are looking at One Software Technologies 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) to account for the debt. For this calculation, we used 9.0% based on a leverage beta of 1.068. 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 one software technology
- Revenue growth over the past year has outpaced the five-year average.
- A liability is not considered a risk.
- Dividends are covered by profit and cash flow.
- Revenue growth has lagged the IT industry over the past year.
- Dividends are low compared to the top 25% of dividend payers in the IT market.
- The current stock price is below the fair value estimate.
- ONE’s earnings outlook is difficult to judge due to the lack of analyst coverage.
- ONE does not pose an obvious threat.
A company’s reputation is important, but it shouldn’t be the only indicator you look at when researching a company. The DCF model is not all about investment valuation. Rather, it should be viewed as a guide to “What assumptions need to be true for this stock to be undervalued/overvalued?” For example, a small adjustment to terminal value growth rate can dramatically change overall results. We have summarized three relevant aspects of One Software Technologies for further consideration.
- risk: What you need to know One Software Technologies One Warning Sign We made that clear before considering investing in the company.
- Other quality alternatives: Do you like all-rounders?expedition Our interactive list of high-quality stocks lets you know what else you might be missing!
- Other Top Analyst Picks: Interested in what the analysts think? Find out which analysts find the future prospects attractive in our interactive list of top stocks!
PS. The Simply Wall St app conducts discounted cash flow valuations for all TASE stocks on a daily basis.If you want to find calculations for other stocks search.
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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 …