【h1b to f1 change of status processing time】Realogy Holdings Corp.'s (NYSE:RLGY) Intrinsic Value Is Potentially 88% Above Its Share Price

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Realogy Holdings Corp. (

NYSE:RLGY

) as an investment opportunity by taking the expected future cash flows and discounting them to today's value. One way to achieve this h1b to f1 change of status processing timeis by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the

Simply Wall St analysis model here

may be something of interest to you.

See our latest analysis for Realogy Holdings

Step by step through the calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$354.5m

US$397.9m

US$378.4m

US$368.0m

US$363.3m

US$362.5m

US$364.4m

US$368.1m

US$373.2m

US$379.3m

Growth Rate Estimate Source

Analyst x4

Analyst x2

Est @ -4.89%

Est @ -2.76%

Est @ -1.27%

Est @ -0.22%

Est @ 0.51%

Est @ 1.02%

Est @ 1.38%

Est @ 1.63%

Present Value ($, Millions) Discounted @ 14%

US$310

US$305

US$254

US$216

US$187

US$163

US$143

US$127

US$113

US$100

("Est" = FCF growth rate estimated by Simply Wall St)

Present Value of 10-year Cash Flow (PVCF)

= US$1.9b

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 14%.

Story continues

Terminal Value (TV)

= FCF

2030

× (1 + g) ÷ (r – g) = US$379m× (1 + 2.2%) ÷ (14%– 2.2%) = US$3.2b

Present Value of Terminal Value (PVTV)

= TV / (1 + r)

10

= US$3.2b÷ ( 1 + 14%)

10

= US$852m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$2.8b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$12.8, the company appears quite undervalued at a 47% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf

The assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Realogy Holdings 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 accounts for debt. In this calculation we've used 14%, which is based on a levered beta of 2.000. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Realogy Holdings, we've compiled three additional aspects you should consider:

Risks

: Take risks, for example - Realogy Holdings has

2 warning signs

(and 1 which doesn't sit too well with us)

we think you should know about.

Future Earnings

: How does RLGY'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

.

Other Solid Businesses

: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore

our interactive list of stocks with solid business fundamentals

to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just

search here

.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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