Cushman & Wakefield plc (NYSE:CWK) Intrinsic Value Estimate

Key information

• Cushman & Wakefield’s estimated fair value is $12.33 based on 2-stage free cash flow to equity
• The current share price of $10.25 suggests that Cushman & Wakefield is potentially trading close to its fair value
• The analyst price target of $12.86 for CWK is 4.3% above our fair value estimate

How far is Cushman & Wakefield plc (NYSE:CWK) from its intrinsic value? Using the latest financial data, we will look at the fair share price, estimating the company’s future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Patterns like these may appear beyond a layperson’s understanding, but they are fairly easy to follow.

Companies can be valued in many ways, so we would stress that a DCF is not perfect for every situation. For keen learners of equity analysis, the Simply Wall St analysis model here may be of interest to you.

See our latest analysis for Cushman & Wakefield

What is the estimated rating?

We use what is known as a 2-stage model, which simply means that we have two different periods of growth rates for the company’s cash flows. Generally, the first stage is a higher growth and the second stage is a lower growth phase. For starters, we need to get cash flow estimates over the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate forward free cash flow (FCF) from the last estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of decline and that companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow more in early years than in later years.

In general, we assume that a dollar today is worth more than a dollar in the future, and so the sum of these future cash flows is then discounted to today’s value:

10-year free cash flow (FCF) forecast

(“Est” = Simply Wall St’s estimated FCF growth rate)
Present value of 10-year cash flow (PVCF) = $1.6 billion

Now we need to calculate the terminal value, which accounts for all future cash flows after this ten year period. For several 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 Treasury yield (2.4%) to estimate future growth. In the same way as in the 10-year “growth” period, we discount the future cash flows to present value using a cost of equity of 13%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = $421 million × (1 + 2.4%) ÷ (13%– 2.4%) = $4.1 billion

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= $4.1 billion ÷ ( 1 + 13%)¹⁰= $1.2 billion

The total value is the sum of the cash flows for the next ten years plus the discounted terminal value, which results in the equity value, which in this case is $2.8 billion. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of $10.3, the company looks at a fair value at a 17% discount to where the share price is currently trading. Remember, however, that this is only a rough estimate, and like any complex formula – garbage in, garbage out.

Important assumptions

The above calculation depends heavily on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these entries, I recommend you redo the calculations yourself and play around with them. DCF also does not take into account the possible cyclicality of an industry or a company’s future capital requirements, so it does not provide a complete picture of a company’s potential performance. Since we are looking at Cushman & Wakefield 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) that accounts for debt. In this calculation we used 13%, which is based on a leveraged beta of 1.915. Beta is a measure of a stock’s volatility compared to the market as a whole. We derive our beta from the industry beta average of globally comparable companies, with an imposed limit of 0.8 to 2.0, which is a reasonable range for a stable business.

SWOT analysis for Cushman & Wakefield

Crossing over:

While a company’s valuation is important, it is only one of many factors you need to evaluate for a company. DCF models are not all investment valuations. It should be seen more as a guide to “what assumptions must be true for this stock to be undervalued/overvalued?” For example, if the growth rate of the terminal value is slightly adjusted, it can dramatically change the overall result. For Cushman & Wakefield, there are three fundamental factors you should explore:

1. risks: We think you should rate 3 warning signs for Cushman & Wakefield (1 is a bit worrying!) I flagged before making an investment in the company.
2. Future earnings: How does CWK’s growth rate compare to its peers and the broader market? Dig deeper into the analyst consensus numbers for the coming years by interacting with our free analyst growth expectations chart.
3. Other solid businesses: Low debt, high return on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with strong business fundamentals to see if there are any other companies you may not have considered!

P.S. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock, just search here.

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This article from Simply Wall St is general in nature. We only provide commentary based on historical data and analyst forecasts using an unbiased methodology, and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We aim to provide you with focused long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or quality materials. Simply Wall St has no position in any of the stocks mentioned.

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