A Look At The Fair Value Of Euronet Worldwide, Inc. (NASDAQ: EEFT)
With the stock down -12.5% over the prior six months, investors may be tempted to sell shares of Euronet Worldwide, Inc. (NASDAQ: EEFT). In this article, I am going to calculate the fair value of Euronet Worldwide by forecasting its future cash flows and discounting them back to today’s value. Investors may find the results of the analysis surprising.
The basic philosophy behind a DCF analysis is that the intrinsic value of a company is equal to the future cash flows of that company, discounted back to present value. The general formula is provided below. The intrinsic value is considered the actual value or “true value” of an asset based on an individual’s underlying expectations and assumptions.
Cash flows into the firm in the form of revenue as the company sells its products and services, and cash flows out as it pays its cash operating expenses such as salaries or taxes (taxes are part of the definition for cash operating expenses for purposes of defining free cash flow, even though taxes aren’t generally considered a part of operating income). With the leftover cash, the firm will make short-term net investments in working capital (an example would be inventory and receivables) and longer-term investments in property, plant and equipment. The cash that remains is available to pay out to the firm’s investors: bondholders and common shareholders.
I will take you through my own expectations for Euronet Worldwide as well as explain how I arrived at certain assumptions. The full analysis was completed on Monday, March 19. An updated analysis using real-time data can be viewed in your web browser at finbox.io's Euronet Worldwide DCF analysis page. The steps involved in the valuation are:
1. Forecast Free Cash Flows
Create a revenue forecast
Forecast EBITDA profit margin
2. Select a discount rate
3. Estimate a terminal value
4. Calculate the equity value
Step 1: Forecast Free Cash Flows
The key assumptions that have the greatest impact on cash flow projections are typically related to growth, profit margin and investments in the business. The analysis starts at the top of the income statement by creating a forecast for revenue and then works its way down to net operating profit after tax (NOPAT), as shown below.
From NOPAT, deduct cash outflows like capital expenditures and investments in net working capital and add back non-cash expenses from the income statement such as depreciation and amortization to calculate the unlevered free cash flow forecast (shown above).
Create A Revenue Forecast
When available, the finbox.io’s pre-built models use analyst forecasts as the starting assumptions. To forecast revenue, analysts gather data about the company, its customers and the state of the industry. I typically review the analysts’ forecast and modify the growth rates based on historical performance, news and other insights gathered from competitors. Note that if a company only has a small number of analysts giving projections, the consensus forecast tends to not be as reliable as companies that have several analysts’ estimates. Another check for reliability is to analyze the range of estimates. If the range is really wide, it may be less accurate.
Euronet Worldwide provides payment and transaction processing and distribution solutions to financial institutions, retailers, service providers, and individual consumers worldwide. The company was founded in 1994 and is headquartered in Leawood, Kansas. Analysts covering the stock often compare the company to a peer group that includes DST Systems, Inc. (NYSE: DST), Global Payments Inc. (NYSE: GPN), Total System Services, Inc. (NYSE: TSS), and Western Union Company (NYSE: WU).
source: Benchmarks: Forecasted 5yr Revenue CAGRs
The company's 5-year revenue CAGR of 12.2% is above its selected comparable public companies: DST (-3.0%), GPN (10.8%) and WU (-0.5%) and only below TSS (22.4%). The company's projected 5-year revenue CAGR of 11.4% is above all of its selected comparable public companies.
As highlighted below, Euronet Worldwide's revenue growth has ranged from 6.5% to 17.8% over the last five fiscal years.
Going forward, analysts forecast that Euronet Worldwide's total revenue will reach $3,869 million by fiscal year 2022 representing a five-year CAGR of 11.4%. However, I conservatively adjusted my growth estimates lower as illustrated in the table below.
