TransUnion (NYSE:TRU) shares could be 46% below their estimated intrinsic value

Key findings

• Using the 2-step free cash flow to equity, TransUnion’s fair value is $150.
• The current share price of $80.95 suggests that TransUnion may be undervalued by 46%
• The analyst price target of $90.06 for TRU is 40% below our fair value estimate

In this article, we will estimate the intrinsic value of TransUnion (NYSE:TRU) by taking the expected future cash flows and discounting them to their present value. Our analysis will use the Discounted Cash Flow (DCF) model. Models like this may seem incomprehensible to a layperson, but they are relatively easy to follow.

Companies can be valued in many ways, so we want to point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, you can read the basics of this calculation in detail in Simply Wall St’s analysis model.

Check out our latest analysis for TransUnion

Processing the numbers

We use what is called a 2-stage model, which simply means that we have two different growth periods for the company’s cash flows. Generally speaking, the first stage is one of higher growth, and the second stage is one of lower growth. First, we need to get estimates for 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 that companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will slow their growth rate, over this period. We do this to take into account that growth tends to slow more in the early years than in later years.

A DCF is all about the idea that a dollar in the future is worth less than a dollar today. Therefore, we need to discount the sum of these future cash flows to arrive at an estimate of present value:

Estimation of free cash flow (FCF) over 10 years

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 9.3 billion US dollars

After calculating the present value of future cash flows in the first 10-year period, we need to calculate the terminal value that takes into account all future cash flows after the first period. The Gordon growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average of the 10-year Treasury yield of 2.4%. We discount the terminal cash flows to today’s value at a cost of equity of 7.1%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = 1.8 billion US dollars × (1 + 2.4%) ÷ (7.1% – 2.4%) = 39 billion US dollars

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 39 billion US dollars ÷ (1 + 7.1%)¹⁰= 20 billion US dollars

The total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total value of equity, which in this case is $29 billion. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of $81.00, the company appears quite undervalued at a 46% discount to the current share price. The assumptions in any calculation have a big impact on the valuation, so it’s better to consider this as a rough estimate that is not accurate to the last penny.

Important assumptions

The key inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. Part of investing is making your own assessment of a company’s future performance, so try the calculation yourself and check your own assumptions. The DCF also does not take into account the potential cyclicality of an industry or a company’s future capital needs, and therefore does not provide a complete picture of a company’s potential performance. Since we are viewing TransUnion 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 takes debt into account. In this calculation, we used 7.1%, which is based on a levered beta of 1.022. Beta is a measure of a stock’s volatility relative to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with a set limit between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT analysis for TransUnion

Go on:

Although the valuation of a company is important, ideally it should not be the only analysis you look at for a company. It is not possible to get a foolproof valuation using a DCF model. A better way would be to apply different cases and assumptions and see how they would affect the valuation of the company. For example, slightly adjusting the growth rate of the terminal value can change the overall result dramatically. Why is the intrinsic value higher than the current share price? For TransUnion, there are three relevant elements that you should examine in more detail:

1. Risks: For example, we found 1 warning signal for TransUnion that you should know.
2. Future income: How is TRU’s growth rate compared to competitors and the overall market? Learn more about analyst consensus numbers for the coming years by using our free chart of analyst growth expectations.
3. Other solid companies: Low debt, high returns on equity, and good past performance are the foundation of a strong company. Check out our interactive list of stocks with solid business fundamentals to see if there are any other companies you may not have considered!

PS The Simply Wall St app runs 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.

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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.

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