Despegar.com, Corp. (NYSE:DESP) intrinsic value may be 49% higher than share price

Key findings

• The projected fair value for Despegar.com is $19.34 based on 2-step Free Cash Flow to Equity

• The current share price of $13.02 suggests that Despegar.com may be undervalued by 33%

• The analyst price target for DESP is $16.92, 13% below our fair value estimate.

Does Despegar.com, Corp. (NYSE:DESP)’s July share price reflect its actual value? Today we’ll estimate the stock’s intrinsic value by taking the company’s projected future cash flows and discounting them to today’s value. To do this, we’ll use the Discounted Cash Flow (DCF) model. Before you think you can’t understand it, just keep reading! It’s actually a lot less complex than you think.

Companies can be valued in many ways, so we would like to point out that a DCF is not perfect for every situation. If you want to learn more about intrinsic value, you should take a look at Simply Wall St’s analysis model.

Check out our latest analysis for Despegar.com

Is Despegar.com fairly rated?

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. The first stage requires us to estimate the company’s cash flows for the next ten years. 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, we need to discount the sum of these future cash flows to arrive at an estimate of present 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) = 804 million US dollars

The story goes on

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 using a cost of equity of 15%.

Final value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = $243 million × (1 + 2.4%) ÷ (15% – 2.4%) = $2.0 billion

Present value of terminal value (PVTV)= TV / (1 + r)¹⁰= $2.0 billion ÷ (1 + 15%)¹⁰= 485 million US dollars

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 $1.3 billion. To get the intrinsic value per share, we divide that by the total number of shares outstanding. Compared to the current share price of $13.00, the company appears quite undervalued at a 33% 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.

The 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 Despegar.com 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 15%, which is based on a leveraged beta of 1.108. 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 Despegar.com

Strength

weakness

Opportunity

Danger

Next Steps:

Although the DCF calculation is important, it should not be the only metric you consider when researching a company. It is not possible to get a foolproof valuation using a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to an undervaluation or overvaluation of the company. For example, changes in the company’s cost of equity or risk-free interest rate can significantly affect the valuation. What is the reason that the stock price is below the intrinsic value? For Despegar.com, we have compiled three relevant factors that you should examine in more detail:

1. Financial health: Does DESP have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks for key factors such as leverage and risk.

2. Future income: How is DESP’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 high-quality alternatives: Like a good all-rounder? Explore our interactive list of high-quality stocks to get a sense of what else you might be missing out on!

PS The Simply Wall St app does 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 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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