key insights
Equifax’s expected fair value is $342 based on two-stage free cash flows into the stock.
Equifax’s stock price of $244 suggests the company may be undervalued by 29%
EFX’s analyst price target of $256 is 25% lower than our fair value estimate
Today we’ll run through one method of estimating Equifax Inc.’s (NYSE:EFX) intrinsic value by projecting its future cash flows and discounting them to today’s value. Here we use a discounted cash flow (DCF) model. It may sound complicated, but it’s actually very easy!
However, keep in mind that there are many ways to estimate a company’s value, and a DCF is just one method. For those who are keen to learn stock analysis, Click here for a simple Wall Street analysis model It might be of interest to you.
See our latest analysis for Equifax.
Method
As the name suggests, we use a two-stage DCF model that considers two stages of growth. The first stage is usually a higher growth period that levels off towards terminal value and is captured by a second “steady growth” period. The first step is to estimate the cash flow to the business over the next 10 years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will see their rate of contraction slow, and companies with growing free cash flow will see their growth rate slow over this period. This reflects the fact that growth tends to be slower in the early years than in later years.
A DCF is based on the idea that a dollar in the future will be worth less than a dollar today. Therefore, we discount the value of these future cash flows to their estimated value in today’s dollars.
Estimated 10-year free cash flow (FCF)
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Leveraged FCF ($, million) | US$991.6 million | 1.26 billion USD | 1.58 billion USD | 1.82 billion USD | 2.02 billion USD | 2.2 billion USD | 2.34 billion USD | 2.47 billion USD | 2.58 billion USD | 2.67 billion USD |
Growth rate estimation source | Analyst x 9 | Analyst x 9 | Analyst x3 | Estimated @ 15.19% | Estimated @ 11.30% | Estimated @ 8.58% | Estimated @ 6.67% | Estimated @ 5.34% | Estimated @ 4.40% | Estimated @ 3.75% |
Present value ($, million) Discounted at 7.0% | $926 | 11,000 USD | $13,000 | $1.4 million | $1.4 million | $15,000 | $15,000 | $1.4 million | $1.4 million | $1.4 million |
(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of cash flows over 10 years (PVCF) = USD 13 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. As with the 10-year “growth” period, we use a cost of capital of 7.0% to discount future cash flows to their present value.
Terminal value (TV)=FCF2033 × (1 + g) ÷ (r – g) = USD 2.7 billion × (1 + 2.2%) ÷ (7.0% – 2.2%) = USD 57 billion
Present Value of Terminal Value (PVTV)= TV / (1 + r)Ten= USD 57 billion ÷ ( 1 + 7.0%)Ten= USD 29 billion
The total value, or equity value, is the sum of the present values of future cash flows, which in this case is US$42 billion. To get the intrinsic value per share, divide this by the total number of shares outstanding. Compared to the current share price of $244, the company appears to be slightly undervalued, at a 29% 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.
Prerequisites
The above calculation relies heavily on two assumptions. One is the discount rate and the other is the cash flow. 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 7.0% based on a leverage beta of 0.961. Beta is a measure of a stock’s volatility in comparison to the market as a whole. Beta values are derived from industry average beta values for globally comparable companies and are constrained to a range 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:
Valuation is only one side of the coin in building an investment thesis, and ideally it should never be the only analytical element scrutinized about a company. It is not possible to obtain a reliable valuation with the DCF model. Rather, it should be viewed as a guide to “What assumptions need to hold true for this stock to be undervalued/overvalued?” For example, a small adjustment to the terminal value growth rate can dramatically change the overall result. Can we figure out why the company is trading at a discount to its intrinsic value?For Equifax, he brings together three relevant factors that need further consideration.
risk: As an example, I found the following: 1 warning sign for Equifax Things to consider before investing here.
future earnings: How does EFX’s growth rate compare to its peers and the broader market? Dive deeper into analyst consensus numbers for the coming years by interacting with the free Analyst Growth Expectations chart.
Other high quality alternatives: Do you like a good all-rounder? Explore Our interactive list of high quality stocks To find out what else I’m missing!
PS. The Simply Wall St app provides daily discounted cash flow valuations for all NYSE stocks. If you want to know the calculations for other stocks, search.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, 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.