Is there a chance with computer programs and systems (NASDAQ: CPSI) with 22% undervaluation?

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<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "We are going to use a method today to estimate the intrinsic value of computers Programs and Systems, Inc. (NASDAQ: CPSI) by estimating the company's future cash flows and discounting them to their present value. This is done with the Discounted Cash Flow (DCF) model. It may sound complicated, but it's actually quite simple! "Data-reactid =" 27 "> Today we will go through a method of estimating the intrinsic value of computer programs and systems, Inc. (NASDAQ: CPSI) by estimating the company. Future cash flows and discounting them to present value (Discounted Cash Flow, DCF ) That may sound complicated, but it is actually quite simple.

<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "We generally believe that the value of a company is the present is the value of all the cash it will generate in the future, but one DCF is just one valuation metric among many and it is not without errors. If you want to learn more about the intrinsic value, you should take a look at the DCF Simply Wall St analysis modelWe generally believe that the value of a company is the present value of all cash that it will generate in the future. Deficiencies: Whoever knows more about the inner world? Want to experience value, should read the analysis model Simply Wall St.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = " Check out our latest analysis for computer programs and systems "data-reactid =" 29 "> Check out our latest analysis for computer programs and systems

Are computer programs and systems adequately evaluated?

We use the two-stage growth model, which means that we only consider two stages of company growth. In the initial phase, the company may have a higher growth rate, and in the second phase it is usually assumed that the growth rate will be stable. First, we need to get estimates of the cash flows over the next ten years. Wherever possible, we use analyst estimates. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the most recent estimate or the most recently reported value. We expect companies with shrinking free cash flow to slow down their rate of shrinkage and that companies with growing free cash flow will slow down their growth rate during this period. We do this to take into account that growth tends to slow down more in the early years than in later years.

In general, we assume that a dollar is more valuable today than a dollar in the future. Therefore, we have to discount the sum of these future cash flows to get a present value estimate:

Estimation of 10-year free cash flow (FCF)

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029
FCF Leverage ($ million) $ 35.0 million $ 32.6 million $ 34.3 million $ 34.4 million $ 34.3 million $ 34.4 million $ 34.7 million $ 35.0 million $ 35.5 million $ 36.0 million
Growth rate Estimated source Analyst x2 Analyst x1 Analyst x1 Analyst x1 Analyst x1 Estimate at 0.33% Estimate at 0.76% Estimate at 1.05% Est @ 1.26% 1.4% estimate
Present value ($. Million) reduced by 8.4% $ 32.2 $ 27.8 $ 26.9 $ 24.9 $ 22.9 $ 21.2 $ 19.7 $ 18.4 $ 17.2 $ 16.1

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "("Est" = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = US $ 227 million data-reactid = "36">("Est" = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = $ 227 million

We now have to calculate the final value, which takes into account all future cash flows after this ten-year period. A very conservative growth rate is used for several reasons, which a country's GDP growth cannot exceed. In this case, we used the interest rate on 10-year government bonds (1.7%) to estimate future growth. As in the 10-year growth period, the future cash flows are discounted to their current value with an equity cost rate of 8.4%.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Terminal value (TV)= FCF2029 × (1 + g) ÷ (r – g) = US $ 36 million × (1 + 1.7%) ÷ 8.4% – 1.7%) = US $ 552 million data reactide = "38">Terminal value (TV)= FCF2029 × (1 + g) ÷ (r – g) = $ 36 million × (1 + 1.7%) ÷ 8.4% – 1.7%) = $ 552 million

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "Present value of the final value (PVTV)= TV / (1 + r)10= $ 552 million (1 + 8.4%)10= US $ 247 million data-reactid = "39">Present value of the final value (PVTV)= TV / (1 + r)10= $ 552 million (1 + 8.4%)10= $ 247 million

The total value or equity value is then the sum of the present value of future cash flows, which in this case is $ 474 million. To get the intrinsic value per share, we divide it by the total number of shares issued. Compared to the current share price of $ 26.6, the company appears to be undervalued at a discount of 22% compared to the current share price. However, keep in mind that this is only an approximate estimate and like any complex formula garbage in, garbage out.

NasdaqGS: CPSI Intrinsic Value, January 5, 2020

The assumptions

We would like to point out that the most important input factors for a discounted cash flow are the discount rate and of course the actual cash flows. Investing also includes evaluating a company's future performance itself. So try the calculation yourself and check your own assumptions. The DCF also does not take into account the potential cyclicality of an industry or the future capital requirements of a company and therefore does not provide a complete overview of a company's potential performance. Given that we consider computer programs and systems to be potential shareholders, the cost of equity is used as the discount rate and not the cost of capital (or weighted average cost of capital, WACC) that make up debt. We used 8.4% in this calculation, which is based on a debt beta of 1.219. Beta is a measure of the volatility of a share compared to the overall market. We get our beta from the industry-standard beta of globally comparable companies with a defined limit between 0.8 and 2.0, which is an appropriate range for stable business.

Next Steps:

While evaluating a company is important, it shouldn't be the only metric you look for when researching a company. The DCF model is not a perfect tool for stock valuation. Rather, it should serve as a guide to "What assumptions must be made for this stock to be under or overvalued?" If a company grows at a different growth rate or if the cost of equity or risk-free interest rates changes significantly, the output can look very different. What is the reason why the stock price differs from the intrinsic value? There are three relevant aspects for computer programs and systems that you should examine in more detail:

  1. Financial health: Does CPSI have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple reviews of key factors like debt and risk.
  2. Future result: What is the growth rate of CPSI compared to its competitors and the broader market? Find out more about analyst consensus numbers for the coming years by accessing our free graph of analyst growth expectations.
  3. Other high quality alternatives: Are there any other high quality stocks you could hold instead of CPSI? Check out our interactive list of high quality stocks to get an idea of ​​what else is missing!

<p class = "Canvas-Atom Canvas-Text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "PS. The Simply Wall St app has a discounted price Cash flow valuation for each share on NASDAQGS every day if you just want to find the calculation for other stocks Search here, "data-reactid =" 65 "> PS. The Simply Wall St app performs a discounted cash flow assessment on a daily basis for each share in NASDAQGS. If you want to find the calculation for other shares, simply search here.

<p class = "canvas-atom canvas-text Mb (1,0em) Mb (0) – sm Mt (0,8em) – sm" type = "text" content = "If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com, This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading."data-reactid =" 66 ">If you discover an error that justifies a correction, please contact the editorial team at editorial-team@simplywallst.com. This article from Simply Wall St is general in nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Simply Wall St has no position in the stocks mentioned.

We strive to provide you with long-term, focused research analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Thank you for reading.