key insights
Equifax’s estimated fair value is US$278 based on two levels of free cash flow into the stock.
At $222, Equifax stock appears to be trading close to its estimated fair value.
EFX analyst price target is $213 23% lower than our fair value estimate
How far is Equifax Inc. ()?New York Stock Exchange:EFX) from its intrinsic value? Use the latest financial data to see if a stock is fairly priced by projecting future cash flows and discounting them to today’s value. This is done using a discounted cash flow (DCF) model. Please read it before you think you don’t understand it. It’s actually much less complicated than you might imagine.
We generally think of a company’s value as the present value of all the cash it will generate in the future. However, DCF is just one metric among many, and it is not without its flaws. For those who are keen to learn stock analysis, Click here for a simple Wall Street analysis model It might be of interest to you.
See our latest analysis for Equifax.
calculation
As the name suggests, we use a two-stage DCF model that considers two stages of growth. The first stage is usually a higher growth period that levels off towards terminal value and is captured by a second “steady growth” period. First, you need to estimate your cash flows for the next 10 years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will see their rate of shrinkage slow, and companies with growing free cash flow will see their growth rate slow over this period. This is to reflect that growth tends to be slower in the early years than in later years.
It is generally assumed that a dollar today is worth more than a dollar in the future, so the sum of these future cash flows must be discounted to obtain an estimate of present value.
10-year free cash flow (FCF) forecast
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Leveraged FCF ($, million) | US$993 million | 1.24 billion USD | 1.42 billion USD | 1.58 billion USD | 1.71 billion USD | 1.83 billion USD | 1.92 billion USD | 2.01 billion USD | 2.08 billion USD | 2.15 billion USD |
Growth rate estimation source | Analyst x 7 | Analyst x 7 | Estimated @ 14.86% | Estimated @ 11.07% | Estimated @ 8.41% | Estimated @ 6.56% | Estimated @ 5.25% | Estimated @ 4.34% | Estimated @ 3.71% | Estimated @ 3.26% |
Present value ($, million) discounted at 7.1% | $927 | 11,000 USD | $1.2 million | $1.2 million | $1.2 million | $1.2 million | $1.2 million | $1.2 million | 11,000 USD | 11,000 USD |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of cash flows over 10 years (PVCF) = USD 11 billion
The second stage is also called the terminal value, which is the cash flow of the business after the first stage. For various reasons, a very conservative growth rate is used that cannot exceed the country’s GDP growth rate. In this case, we used the five-year average of the 10-year Treasury yield (2.2%) to estimate future growth. Similar to the 10-year “growth” period, we use a cost of capital of 7.1% to discount future cash flows to their current value.
Terminal value (TV)=FCF2033 × (1 + g) ÷ (r – g) = USD 2.1 billion × (1 + 2.2%) ÷ (7.1% – 2.2%) = USD 45 billion
Present Value of Terminal Value (PVTV)= TV / (1 + r)Ten= USD 45 billion ÷ ( 1 + 7.1%)Ten= USD 23 billion
The total value is the sum of the cash flows over the next 10 years plus the discounted terminal value, resulting in a total capital value, which in this case is USD 34 billion. The final step is to divide the stock value by the number of shares outstanding. Compared to the current share price of $222, the company appears to be at about fair value, which is a 20% discount to the current share price. The assumptions in the calculations have a significant impact on the valuation, so it’s best to view this as a rough estimate rather than an exact estimate down to the last cent.
Important prerequisites
Now, the most important input to discounted cash flows is the discount rate and, of course, the actual cash flows. If you disagree with these results, try doing the calculations yourself and test your assumptions. Additionally, DCF does not give a complete picture of a company’s potential performance because it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we are considering Equifax as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital with debt taken into account (or weighted average cost of capital, WACC). For this calculation, we used 7.1% based on a leverage beta of 0.970. Beta is a measure of a stock’s volatility compared to the market as a whole. Beta values are derived from industry average beta values for globally comparable companies, with a limit of 0.8 to 2.0, which is a reasonable range for stable businesses.
SWOT analysis of Equifax
strength
Weakness
opportunity
threat
For the future:
While a company’s valuation is important, ideally it is not the only analysis that scrutinizes a company. It is not possible to obtain a reliable valuation with the DCF model. Rather, the best use of DCF models is to test certain assumptions and theories to see if a company is undervalued or overvalued. For example, changes in a company’s cost of equity or risk-free rate can have a significant impact on valuations. We have summarized three important aspects of Equifax that should be further investigated.
risk: As an example, I found the following: 1 warning sign for Equifax Things to consider before investing here.
management:Are insiders capitalizing on market sentiment regarding EFX’s future prospects by buying more shares?check us out Management and board analysis Insights into CEO compensation and governance factors are also included.
Other solid businesses: Low debt, high return on equity, and good past performance are the fundamentals of a strong business.Why not explore? Interactive list of stocks with solid business fundamentals See if there are any other companies you haven’t considered.
PS. Simply Wall St updates DCF calculations for all US stocks daily, so if you want to know the intrinsic value of other stocks, search.
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This article by Simply Wall St is general in nature. We provide commentary using only unbiased methodologies, based on historical data and analyst forecasts, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.