Does the share price for H&R Block Inc (NYSE:HRB) reflect it’s really worth? Today, I will calculate the stock’s intrinsic value using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in January 2018 so be sure check the latest calculation for H&R Block here.
Crunching the numbers
We are going to use a two-stage DCF model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To begin, I took the analyst consensus forecast of HRB’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 10.95%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $1,966.3M. Want to understand how I arrived at this number? Read our detailed analysis here.
Above is a visual representation of how HRB’s top and bottom lines are expected to move in the future, which should give you some color on HRB’s outlook. Next, I calculate the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is $3,862.4M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $5,828.7M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $27.88, which, compared to the current share price of $26.36, we see that H&R Block is about right, perhaps slightly undervalued at a 5.45% discount to what it is available for right now.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For HRB, there are three fundamental factors you should further examine:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.