Estimating the intrinsic value of Cushman & Wakefield plc (NYSE:CWK)

Key findings

• Cushman & Wakefield’s estimated fair value is $12.33 based on 2-step free cash flow to equity
• The current share price of $10.25 suggests that Cushman & Wakefield may be trading close to its fair value
• The analyst price target of $12.86 for CWK is 4.3% above our fair value estimate

How far is Cushman & Wakefield plc (NYSE:CWK) from its intrinsic value? Using the latest financial data, we will check whether the stock is fairly valued by estimating the company’s future cash flows and discounting them to their current value. This is done using 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 would like to point out that a DCF is not perfect for every situation. For those who enjoy stock analysis, the analysis model from Simply Wall St listed here might be of interest.

View our latest analysis for Cushman & Wakefield

What is the estimated value?

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.

In general, we assume that a dollar today is worth more than a dollar in the future. Therefore, the sum of these future cash flows is discounted to today’s value:

10-year free cash flow (FCF) forecast

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = 1.6 billion US dollars

We now need to calculate the terminal value that takes into account all future cash flows after this ten-year period. For various reasons, a very conservative growth rate is used that cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year “growth” period, we discount future cash flows to today’s value, using a cost of equity of 13%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = $421 million × (1 + 2.4%) ÷ (13% – 2.4%) = $4.1 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 4.1 billion US dollars ÷ (1 + 13%)¹⁰= 1.2 billion US dollars

Total value is the sum of the next ten years’ cash flows plus the discounted terminal value, which gives the total equity value, which in this case is $2.8 billion. In the final step, we divide the equity value by the number of shares outstanding. Compared to the current share price of $10.3, the company appears roughly fairly valued at a 17% discount to the current share price. However, keep in mind that this is only an approximate valuation and as with any complex formula, where there’s garbage in, there’s garbage out.

Important assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend repeating the calculations yourself and playing with them. The DCF also doesn’t take into account the possible cyclicality of an industry or a company’s future capital needs and therefore doesn’t provide a complete picture of a company’s potential performance. Since we consider Cushman & Wakefield 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 13%, which is based on a leveraged beta of 1.915. Beta is a measure of a stock’s volatility relative to the overall market. We get our beta from the industry average beta of globally comparable companies with an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT analysis for Cushman & Wakefield

Go on:

While a company’s valuation is important, it is only one of many factors you need to evaluate a company. DCF models are not the be-all and end-all of investment valuation. Rather, they should be viewed as a guide to “what assumptions need to be true for this stock to be under/overvalued.” For example, making a small adjustment to the terminal value growth rate can dramatically change the overall outcome. For Cushman & Wakefield, there are three basic factors you should examine:

1. Risks: We think you should 3 warning signs for Cushman & Wakefield (1 is a bit concerning!) We flagged this before investing in the company.
2. Future income: How is CWK’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. Simply Wall St updates its DCF calculation for every American stock daily, so if you want to find out the intrinsic value of another stock, just search here.

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This Simply Wall St article is of a general nature. We comment based solely on 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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