Estimating The Truthful Worth Of Wyndham Accommodations & Resorts, Inc. (NYSE:WH)

In this article, we’ll look at the intrinsic value of Wyndham Hotels & Resorts, Inc. (NYSE: WH) by estimating the company’s future cash flows and discounting them to their present value. This is done according to the DCF model (Discounted Cash Flow). It may sound complicated, but it’s actually very simple!

Remember, however, that there are many ways to appreciate a company’s value, and a DCF is just one method. If you want to know more about discounted cash flow, you can read the reasons behind this calculation in detail Simply Wall St analysis model.

Check out our latest analysis for Wyndham Hotels & Resorts

The calculation

We use what is called a 2-step model, which simply means that we have two different growth rates for the company’s cash flows. Generally, the first stage is higher growth and the second stage is lower growth phase. First, we need to get estimates of the next ten years of cash flow. We use analyst estimates whenever possible. However, if these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume that companies with shrinking free cash flow will slow their rate of contraction and that companies with increasing free cash flow will slow their growth rate over this period. We do this to reflect that growth tends to slow down more in the first few years than in later years.

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

10-year free cash flow forecast (FCF)

(“Est” = FCF growth rate, estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = $ 2.9 billion

The second level is also known as Terminal Value. This is the company’s cash flow after the first stage. The Gordon growth formula is used to calculate the terminal value using a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today’s value at a cost of equity of 9.4%.

Terminal value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US $ 601M × (1 + 2.0%) ÷ (9.4% – 2.0%) = US $ 8.4b

Present value of the final value (PVTV)= TV / (1 + r) 10 = $ 8.4 billion ÷ (1 + 9.4%) 10 = $ 3.4 billion

The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is $ 6.3 billion. The final step is to divide the equity value by the number of shares issued. Based on the current share price of $ 59.8, the company appears at fair value with a 12% discount to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – garbage in, garbage out.

NYSE: WH Discounted Cash Flow February 3, 2021

The assumptions

The above calculation depends heavily on two assumptions. The first is the discount rate and the other is the cash flows. You do not have to agree to these entries. I recommend repeating the calculations yourself and playing with them. The DCF also does not take into account the possible cyclical nature of an industry or a company’s future capital requirements, so it does not give a complete picture of a company’s potential performance. Given that we view Wyndham Hotels & Resorts as a potential shareholder, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) responsible for debt. In this calculation we used 9.4% based on a leverage beta of 1.400. Beta is a measure of the volatility of a stock compared to the overall market. 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:

While evaluating a company is important, ideally it is not the only analysis you will consider for 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 must be made for this stock to be undervalued or overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can change the overall result dramatically. For Wyndham Hotels & Resorts there are three relevant aspects to investigate:

1. Risks: For example, we discovered 2 warning signs for Wyndham Hotels & Resorts (1 is a little bit worrisome!) To Consider Before Investing Here.
2. management: Have insiders raised their stocks to take advantage of market sentiment for WH’s future prospects? Check out our Management and board analysis with insights into CEO compensation and governance factors.
3. Other high quality alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks To get an idea of ​​what else is out there, you may be missing!

PS. Simply Wall St updates its DCF calculation for each American stock daily, so if you just want to find the intrinsic value of another stock Search here.

Funded
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This article from Simply Wall St is of a general nature. It is not a recommendation to buy or sell shares and does not take into account your goals or your financial situation. We want to provide you with a long-term, focused 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 the stocks mentioned.
* Interactive brokers have been rated as Lowest Cost Brokers by StockBrokers.com. Annual online review 2020

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