Yahoo Finance Estimating The Intrinsic Value Of Ciena Corporation (NYSE:CIEN)
In this article I am going to calculate the intrinsic value of Ciena Corporation (NYSE:CIEN) by estimating the company’s future cash flows and discounting them to their present value. This is done using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not August 2018 then I highly recommend you check out the latest calculation for Ciena by following the link below.
See our latest analysis for Ciena
Crunching the numbers
I use what is known as a 2-stage model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a more stable growth phase. To begin with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow forecast
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF ($, Millions) | $205.90 | $256.10 | $285.00 | $305.28 | $327.01 |
Source | Analyst x5 | Analyst x6 | Analyst x2 | Est @ 7.12% | Est @ 7.12% |
Present Value Discounted @ 10.4% | $186.50 | $210.12 | $211.80 | $205.50 | $199.39 |
Present Value of 5-year Cash Flow (PVCF)= US$1.01b
After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 10.4%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$327.0m × (1 + 2.9%) ÷ (10.4% – 2.9%) = US$4.52b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$4.52b ÷ ( 1 + 10.4%)5 = US$2.76b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$3.77b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of $26.38. Relative to the current share price of $27.71, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.
Important assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don’t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at Ciena as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 10.4%, which is based on a levered beta of 1.057. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company. For CIEN, I’ve put together three fundamental aspects you should further research:
Financial Health: Does CIEN 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.
Future Earnings: How does CIEN’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.
Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of CIEN? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the NYSE every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
