Copart, Inc. (NASDAQ:CPRT) may be overvalued, with its intrinsic value potentially 22% below its current share price. Using a discounted cash flow (DCF) model, we can estimate the stock’s intrinsic value by projecting its future cash flows and discounting them to their present value. While there are different ways to value a company, the DCF model provides insight into whether a stock is fairly priced or not.
In the DCF model, we use a two-stage approach that considers two periods of growth. The first stage represents a higher growth period that eventually levels off during the second steady growth phase. In the first stage, we estimate the cash flows the company will generate over the next ten years. Analyst estimates are used whenever possible, but in the absence of these, we extrapolate previous free cash flow (FCF) data. We assume that companies with declining FCF will experience a slower rate of decline, while companies with growing FCF will see their growth rate decelerate over the ten-year period.
To determine the intrinsic value, we discount the sum of these future cash flows to their present value. The present value of the ten-year cash flow is estimated to be around US$12 billion. After calculating the present value of the cash flows from the initial period, we then calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. To be conservative, we use a growth rate that cannot exceed a country’s GDP growth rate. In this case, we have used the 5-year average of the 10-year government bond yield (2.1%) as the growth rate. We discount the future cash flows to their present value using a cost of equity of 7.4%.
Adding the present value of the ten-year cash flow and the discounted terminal value gives us the Total Equity Value, which amounts to US$34 billion. Dividing this value by the total number of shares outstanding gives us the intrinsic value per share. Based on this calculation, we find that the intrinsic value of Copart stands at US$88.63, which is about 20% lower than the current share price of US$90.3.
It’s important to note that this is only an approximation and should not be considered as a foolproof valuation. The DCF model has its limitations, as it does not account for industry cyclicality or a company’s future capital requirements. Therefore, it’s essential to consider other factors and metrics when evaluating a company’s investment potential.
In conclusion, according to the DCF model, Copart, Inc. may be slightly overvalued at its current share price. Investors should conduct thorough research and consider multiple factors before making any investment decisions.
