Calculating The Fair Value Of Autohome Inc. (NYSE:ATHM)

Autohome, Inc. Sponsored ADR Class A -3.83%

Autohome, Inc. Sponsored ADR Class A

ATHM

26.35

-3.83%

Key Insights

  • The projected fair value for Autohome is US$31.84 based on 2 Stage Free Cash Flow to Equity
  • With US$26.00 share price, Autohome appears to be trading close to its estimated fair value
  • The CN¥31.73 analyst price target for ATHMis comparable to our estimate of fair value.

Does the April share price for Autohome Inc. (NYSE:ATHM) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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.

View our latest analysis for Autohome

Is Autohome Fairly Valued?

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 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) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF (CN¥, Millions) CN¥1.69b CN¥2.13b CN¥2.14b CN¥1.94b CN¥1.84b CN¥1.78b CN¥1.76b CN¥1.75b CN¥1.76b CN¥1.77b
Growth Rate Estimate Source Analyst x3 Analyst x4 Analyst x2 Analyst x1 Est @ -5.41% Est @ -3.10% Est @ -1.48% Est @ -0.35% Est @ 0.44% Est @ 1.00%
Present Value (CN¥, Millions) Discounted @ 8.2% CN¥1.6k CN¥1.8k CN¥1.7k CN¥1.4k CN¥1.2k CN¥1.1k CN¥1.0k CN¥930 CN¥863 CN¥805

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥12b

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 a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.3%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.2%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = CN¥1.8b× (1 + 2.3%) ÷ (8.2%– 2.3%) = CN¥31b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CN¥31b÷ ( 1 + 8.2%)10= CN¥14b

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥26b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$26.0, the company appears about fair value at a 18% 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
NYSE:ATHM Discounted Cash Flow April 29th 2024

The Assumptions

Now 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 Autohome 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 8.2%, which is based on a levered beta of 1.053. 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.

SWOT Analysis for Autohome

Strength
  • Earnings growth over the past year exceeded its 5-year average.
  • Currently debt free.
  • Dividends are covered by earnings and cash flows.
Weakness
  • Earnings growth over the past year underperformed the Interactive Media and Services industry.
  • Dividend is low compared to the top 25% of dividend payers in the Interactive Media and Services market.
Opportunity
  • Annual earnings are forecast to grow for the next 3 years.
  • Good value based on P/E ratio and estimated fair value.
Threat
  • Annual earnings are forecast to grow slower than the American market.

Next Steps:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. 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. For Autohome, we've compiled three fundamental factors you should look at:

  1. Risks: For instance, we've identified 1 warning sign for Autohome that you should be aware of.
  2. Future Earnings: How does ATHM'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!

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.

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