Investors Are Undervaluing Unisys Corporation (NYSE:UIS) By 37.35%

How far off is Unisys Corporation (NYSE:UIS) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced
by taking the foreast future cash flows of the company and discounting them back to today’s value.
This is done using the
discounted cash flows (DCF)
model.
It may sound complicated, but actually it is quite simple!
If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model.
Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below.


See our latest analysis for Unisys

Step by step through the calculation

I’m using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate.
In the first stage we need to estimate the cash flows to the business over the next five years.
For this I used the consensus of the analysts covering the stock, as you can see below.
I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow estimate

20182019202020212022
Levered FCF ($, Millions)$81.00$105.00$113.00$114.00$147.00
SourceAnalyst x1Analyst x1Analyst x1Analyst x1Analyst x1
Present Value Discounted @ 14.17%$70.95$80.55$75.93$67.10$75.78

Present Value of 5-year Cash Flow (PVCF)= US$370.31m

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage.
For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 14.2%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$147.00m
× (1 + 2.9%) ÷ (14.2% – 2.9%) = US$1.35b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$1.35b / ( 1 + 14.2%)5 = US$695.30m

The total value, or equity value, is then the sum of the present value of the cash flows,
which in this case is US$1.07b.
The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number.

This results in an intrinsic value of $20.91.

Relative
to the current share price of $13.1, the stock is
quite undervalued
at a 37.35% discount to what it is available for right now.


NYSE:UIS Intrinsic Value June 14th 18
NYSE:UIS Intrinsic Value June 14th 18

Important assumptions

I’d like to point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows.
If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions.
Because we are looking at Unisys as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt.
In this calculation I’ve used 14.2%, which is based on a levered beta of 1.592. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it
shouldn’t be the only metric you look at when researching a company.
What is the reason for the share price to differ from the intrinsic value?
For UIS,
I’ve compiled
three
relevant
aspects
you should
further examine:

  1. Financial Health: Does UIS have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does UIS’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of UIS? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.

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This post was originally published here via Google News