In our previous posts we determined TWC's CAPM and WACC and now we are ready to determine their valuation based upon discounted cash flows or DCF.
DCF is an accepted method for valuing established companies and even though this incarnation of TWC is only a few years old, the actual business is an established enterprise.
There are a host of assumptions required to arrive at projected cash flows. Given my inexperience in valuation, I expect my assumptions will differ considerably from professional analysts.
I have used the following assumptions to arrive at a cash flow estimate:
- Sales grow at 3% (some analysts are predicting 7% growth)
- COGS constant at 47% of sales
- SGA constant at 17% of sales
- Depreciation + Amortization constant at 18.2% of PP&E + intangibles including goodwill
- Intangible assets constant at 4.1% of sales
- Goodwill constant at 12.5% of sales
- PP&E remains at 2012 numbers
- CapEx spending remains flat at 2012 levels (note: I can't get the calculated capital spend to equal the stated amount. It should be new PP&E - old PP&E + depreciation expense, right? But that doesn't balance with the given numbers).
- The tax rate is fixed at 40%, reflecting their current rate.
Now we are ready to review the cash flows. Below is my estimation of cash flows.
The key takeaways here include the growth rate of 3% over time. Some analysts are predicting 7% growth in sales over next year or two, but I am being more conservative. The industry is expected to be stagnant or shrink so 3% seems optimistic in my opinion.
The terminal value is the standard formula of the final cash flow multiplied by 1 + the growth rate and all of that divided by the difference between the growth rate and the discount rate... Terminal Value = CF * (1 + tax rate) / (growth rate - discount rate).
With these numbers, TWC is valued at $85 billion, which is about 11x EBITDA.
TWC's board has indicated they will not settle for anything less than 8x EBITDA. The interesting thing to me is how the analysts are valuing the company... I would like to see their cash flow estimates.
I hope you found this interesting.