Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Intuit Inc (NASDAQ:INTU) as an investment opportunity. 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 March 2018 so be sure check the latest calculation for Intuit here.

What’s the value?

We are going to use a two-stage DCF model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. Firstly, I pulled together the analyst consensus estimates of INTU’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 9.55%. 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 US$8.18B. Want to understand how I calculated this value? Read our detailed analysis here.

Above is a visual representation of how INTU’s top and bottom lines are expected to move in the future, which should give you an idea of INTU’s outlook. Now we need to determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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. Discounting the terminal value back five years gives us a present value of US$24.29B.

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$32.48B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $126.80, which, compared to the current share price of $173.25, we find that Intuit is quite expensive and not available at a discount at this time.

Next Steps:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For INTU, there are three pertinent factors you should further research:

1. Financial Health: Does INTU have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

2. Future Earnings: How does INTU’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of INTU? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!