A Look At The Fair Value Of The Ensign Group, Inc. (NASDAQ:ENSG)

Ensign Energy +1.53%

Ensign Energy

ENSG

118.26

+1.53%

Key Insights

  • Using the 2 Stage Free Cash Flow to Equity, Ensign Group fair value estimate is US$122
  • Ensign Group's US$112 share price indicates it is trading at similar levels as its fair value estimate
  • The US$113 analyst price target for ENSG is 7.8% less than our estimate of fair value

Does the December share price for The Ensign Group, Inc. (NASDAQ:ENSG) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. There's really not all that much to it, even though it might appear quite complex.

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 still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Ensign Group

Crunching The Numbers

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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$239.0m US$258.0m US$272.4m US$284.9m US$295.9m US$305.9m US$315.2m US$324.0m US$332.5m US$340.8m
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ 5.59% Est @ 4.58% Est @ 3.87% Est @ 3.38% Est @ 3.03% Est @ 2.79% Est @ 2.62% Est @ 2.50%
Present Value ($, Millions) Discounted @ 6.3% US$225 US$229 US$227 US$224 US$219 US$213 US$206 US$199 US$193 US$186

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$2.1b

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. 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 (2.2%) 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 6.3%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$341m× (1 + 2.2%) ÷ (6.3%– 2.2%) = US$8.6b

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$8.6b÷ ( 1 + 6.3%)10= US$4.7b

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$6.8b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$112, the company appears about fair value at a 8.0% 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.

dcf
NasdaqGS:ENSG Discounted Cash Flow December 30th 2023

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. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 Ensign Group 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 6.3%, which is based on a levered beta of 0.806. 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 Ensign Group

Strength
  • Earnings growth over the past year exceeded the industry.
  • Debt is not viewed as a risk.
Weakness
  • Earnings growth over the past year is below its 5-year average.
  • Dividend is low compared to the top 25% of dividend payers in the Healthcare market.
Opportunity
  • Annual revenue is forecast to grow faster than the American market.
  • 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 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Ensign Group, we've put together three important aspects you should further examine:

  1. Financial Health: Does ENSG have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does ENSG'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 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 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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