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Cirrus Logic, Inc. (NASDAQ:CRUS) Shares Could Be 32% Below Their Intrinsic Value Estimate

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How far off is Cirrus Logic, Inc. (NASDAQ:CRUS) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

See our latest analysis for Cirrus Logic

Is Cirrus Logic fairly valued?

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

Levered FCF ($, Millions)

US$306.2m

US$327.5m

US$345.5m

US$360.8m

US$374.1m

US$385.9m

US$396.8m

US$406.9m

US$416.5m

US$425.9m

Growth Rate Estimate Source

Est @ 9.14%

Est @ 6.99%

Est @ 5.48%

Est @ 4.42%

Est @ 3.69%

Est @ 3.17%

Est @ 2.81%

Est @ 2.55%

Est @ 2.37%

Est @ 2.25%

Present Value ($, Millions) Discounted @ 6.8%

US$287

US$287

US$284

US$277

US$269

US$260

US$251

US$241

US$231

US$221

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.6b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 6.8%.