In this article we are going to estimate the intrinsic value of Royal Caribbean Cruises Ltd. (NYSE:RCL) by taking the expected future cash flows and discounting them to today’s value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too difficult to follow, as you’ll see from our example!

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. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

See our latest analysis for Royal Caribbean Cruises

the model

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To begin with, we have to get estimates of 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2022 2023 2024 2025 2026 2027 2028 2029 2030 2031
Leveraged FCF ($, Millions) -US$1.80b US$1.03b US$1.15b US$1.58b US$1.90b US$2.14b US$2.34b US$2.51b US$2.65b US$2.76b
Growth Rate Estimate Source Analyst x4 Analyst x4 Analyst x1 Analyst x1 Analyst x1 Est @ 12.54% Est @ 9.35% Est @ 7.12% Est @ 5.56% Est @ 4.47%
Present Value ($, Millions) Discounted @ 9.2% -US$1.6k US$864 US$885 US$1.1k US$1.2k US$1.3k US$1.3k US$1.2k US$1.2k US$1.1k

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$8.6b

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the terminal value, which accounts for all future cash flows beyond 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 1.9%. We discount the terminal cash flows to today’s value at a cost of equity of 9.2%.

Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US$2.8b × (1 + 1.9%) ÷ (9.2% – 1.9%) = US$39b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$39b÷ ( 1 + 9.2%)10= US$16b

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$25b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$83.8, the company appears about fair value at a 14% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

NYSE:RCL Discounted Cash Flow April 1st 2022

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flow. 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 Royal Caribbean Cruises 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 9.2%, which is based on a levered beta of 1.711. 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.

Looking Ahead:

Whilst important, the DCF calculation shouldn’t be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/overvalued?” For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Royal Caribbean Cruises, we’ve put together three fundamental aspects you should explore:

  1. risk: As an example, we’ve found 2 warning signs for Royal Caribbean Cruises that you need to consider before investing here.
  2. future earnings: How does RCL’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 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!

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

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

 

Mlb Live Stream MLB Streams Reddit mlb streams  mlbstreams  mlblivestream

ronaldo7 ronaldo7net ronaldo 7  ronaldo7 live ronaldo7 streams cr7 streams

NFL Streams | Reddit NFL Streams – nfl live stream  nflbite nflstreams livenfl

NBA Streams | Reddit NBA Streams | Nbabite Live nbastreams nbalive nbabite livenbastreams

Watch UFC Live Stream | MMA Streams | Reddit MMA Streams | UFC Streams ufcstreams ufc live stream liveufc ufcstreams