Remember the outrageous intrinsic value estimate from the Quicken stock evaluator?
quicken.com
I was wondering where this figure could have come from and found this discussion over on the G&K thread:
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I found this to be very interesting. The initial earnings figure used for Quicken's intrinsic value calculation uses last years EPS times the shares outstanding. The figure that Pirah Naman would choose to apply here would be the "Free cash flow" rather than simply the earnings. His simplified formula for that is FCF = cash flow earnings minus capital expenditures.
This approach would reduce the first number used in the Quicken calculation, since much of the earnings need to be reinvested to keep the company growing, and some of the reported earnings are not yet realized as cash. Quicken does account for the debt though, so that part of the capital expenditures is figured in.
Still, in last years 10K, the "realized retained earnings" was negative, so a calculation of free cash flow based on that number would make this type of intrinsic value calculation meaningless.
WCAP BALANCE SHEET DATA (last 10K)
Loans and investment portfolio
including assets acquired in
liquidation $45,311,218
Total assets $50,128,912
SBA debentures $15,300,000
Common stock (including additional
paid-in capital)
$ 9,264,680
Realized retained earnings (deficit)
$ (301,434)
Total shareholders' equity $33,477,319
However, this is all based on last years numbers. Even with a reported loss on the most recent quarter (which may not happen depending on how much CMRC was sold), this year's 10K is going to show between 3 and 4 times the earnings of last year. The "free cash flow" could be much smaller than reported earnings, but the earnings growth rate is going to be huge. This is the second number to plug into Quicken's equation.
I noticed that Quicken's evaluator defaults to the "Sector 10 year growth rate" - the sector being investment banking. The actual company rate can be pulled down from the menu also. They list WCAP's current rate at 320%! So in that part of their default calculation, they are actually being conservative.
I'm wondering what number should really be used for the FCF, which is what I think should be used rather than earnings, and I could never rely on a formula that projected 320% growth for each of the next ten years. It goes down to a steady 6% after that according to Quicken's explanation:
Walk through: If we assume initial earnings of $24.9 million grow at a rate of 22.23%, and we discount those future earnings at a rate of 17.00%, we arrive at a net present value for the company's next 10 years of earnings of $319 million. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $785 million. To complete the calculation we add these two figures together, subtract the long-term debt for WCAP ($20.9 million), and divide by the outstanding shares (5.35 million) to get a per share intrinsic value of $202.73.
Trying to be conservative, I ran the evaluator again with numbers of my own. Assuming we can clear just $1 million this year in bankable free cash flow, and that we can continue to average 50% returns on all of these pre-IPO investments - (much less than our current average) - I got an intrinsic value of $61.54. To me at least, this seems like a more realistic way to compare us, valuation-wise.
Walk through: If we assume initial earnings of $1.00 million grow at a rate of 50.00%, and we discount those future earnings at a rate of 17.00%, we arrive at a net present value for the company's next 10 years of earnings of $50.0 million. To account for potential earnings beyond the 10th year, we estimate a growth rate of 6.00%, a discount rate of 12.00%, and we arrive at a continuing value of $300 million. To complete the calculation we add these two figures together, subtract the long-term debt for WCAP ($20.9 million), and divide by the outstanding shares (5.35 million) to get a per share intrinsic value of $61.54.
It will be interesting to plug in the new numbers when we get our new 10K. If anyone has any more insight into this type of valuation tool, or what number more accurately reflects the free cash flow, please share it. I don't think that either book value or NAV are fair methods based on the outstanding earnings growth we have, but we also need some more history to settle on a growth projection. |
