TD SYNNEX Corporation (NYSE:SNX) Intrinsic Value Calculation
Today we’re going to walk through one way to estimate the intrinsic value of TD SYNNEX Corporation (NYSE:SNX) by taking expected future cash flows and discounting them to the present value. Our analysis will use the discounted cash flow (DCF) model. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
Remember though that there are many ways to estimate the value of a business and a DCF is just one method. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something that interests you.
See our latest analysis for TD SYNNEX
Is TD SYNNEX valued at its fair value?
We will use a two-stage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
Generally, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
10-Year Free Cash Flow (FCF) Forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF ($, millions) | $636.0 million | $892.0 million | $717.3 million | $623.2 million | $569.6 million | $538.7 million | $521.4 million | $512.7 million | $509.8 million | $510.7 million |
Growth rate estimate Source | Analyst x1 | Analyst x1 | Is @ -19.58% | Is @ -13.12% | Is @ -8.6% | East @ -5.43% | Is @ -3.21% | Is @ -1.66% | Is @ -0.57% | Is at 0.19% |
Present value (millions of dollars) discounted at 7.9% | $589 | $766 | $571 | $459 | $389 | $341 | $306 | $278 | $257 | $238 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $4.2 billion
After calculating the present value of future cash flows over the initial 10-year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. For a number of reasons, a very conservative growth rate is used which cannot exceed that of a country’s GDP growth. In this case, we used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 7.9%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = $511 million × (1 + 2.0%) ÷ (7.9%–2.0%) = $8.7 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $8.7 billion ÷ (1 + 7.9%)^{ten}= $4.1 billion
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is $8.3 billion. The final step is to divide the equity value by the number of shares outstanding. Compared to the current share price of US$101, the company appears to be roughly fair value at the time of writing. The assumptions of any calculation have a big impact on the valuation, so it’s best to consider this as a rough estimate, not accurate down to the last penny.
The hypotheses
Now, the most important inputs to a discounted cash flow are the discount rate and, of course, the actual cash flows. If you disagree with these results, try the math yourself and play around with the assumptions. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider TD SYNNEX as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which takes debt into account. In this calculation, we used 7.9%, which is based on a leveraged beta of 1.363. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Let’s move on :
While important, calculating DCF shouldn’t be the only metric to consider when researching a business. It is not possible to obtain an infallible valuation with a DCF model. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. If a company grows at a different rate, or if its cost of equity or risk-free rate changes sharply, output may be very different. For TD SYNNEX, there are three additional aspects you should consider:
- Risks: Be aware that TD SYNNEX displays 2 warning signs in our investment analysis and 1 of them makes us a little uncomfortable…
- Future earnings: How does SNX’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other high-quality alternatives: Do you like a good all-rounder? Explore our interactive list of high-quality actions to get an idea of what you might be missing!
PS. The Simply Wall St app performs a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.
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