Century Casinos, Inc. (NASDAQ:CNTY)’s intrinsic value may be 51% above its share price

Key findings

• Using the 2-step free cash flow to equity, the estimated fair value of Century Casinos is $4.39.
• The current share price of $2.90 suggests that Century Casinos may be undervalued by 34%
• The analyst price target for CNTY is USD 4.50, 2.5% above our fair value estimate.

Does Century Casinos, Inc. (NASDAQ:CNTY)’s June share price reflect its true value? Today, we will estimate the stock’s intrinsic value by taking the expected future cash flows and discounting them to today’s value. This is done using the Discounted Cash Flow (DCF) model. It’s actually not a big effort, even though it may seem quite complex.

We generally believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without its flaws. Anyone interested in learning more about intrinsic value should check out Simply Wall St’s analysis model.

Check out our latest analysis for Century Casinos

Step by step through the calculation

We use the two-stage growth model, which simply means that we consider two stages of the company’s growth. In the early stage, the company might have a higher growth rate, and in the second stage, a stable growth rate is usually assumed. First, we need to get estimates of the next ten years of cash flows. Where possible, we use analyst estimates, but when these are not 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, 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) = 54 million US dollars

The second period is also called the terminal value. This is the company’s cash flow after the first period. For various reasons, a very conservative growth rate is used, which cannot exceed a country’s GDP growth. In this case, we used the 5-year average of the 10-year Treasury 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 12%.

Final value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = $22 million × (1 + 2.4%) ÷ (12% – 2.4%) = $241 million

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= 241 million US dollars ÷ (1 + 12%)¹⁰= 81 million US dollars

The total value or equity value is then the sum of the present value of future cash flows, which in this case is $135 million. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of $2.9, the company appears quite undervalued at a 34% discount to the current share price. However, valuations are imprecise instruments, much like a telescope – move a few degrees and you end up in another galaxy. Keep this in mind.

Important assumptions

The above calculation relies heavily on two assumptions. The first is the discount rate and the other is 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. DCF also does not take into account the possible 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 considering Century Casinos 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 12%, which is based on a leveraged beta of 2,000. 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 an imposed limit of between 0.8 and 2.0, which is a reasonable range for a stable company.

SWOT Analysis for Century Casinos

Looking ahead:

Valuation is only one side of the coin in developing your investment thesis and should not be the only metric you consider when researching a company. The DCF model is not a perfect tool for stock valuation. Rather, you should apply different cases and assumptions and see how they affect the company’s valuation. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. What is the reason for the stock price to be below the intrinsic value? For Century Casinos, we have compiled three other aspects you should examine:

1. Risks: For this purpose, you should consult the 2 warning signs we discovered it at Century Casinos.
2. Future income: How does CNTY’s growth rate compare to its 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 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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