(tl;dr: am I accounting for debt correctly in my discounted cash flow models? pictures below of balance sheet and two examples that demonstrate my use of (npv(8%, range) + net cash) / shares outstanding) (the pictures don't display the values after 10years, but I am assuming a 2% terminal value in both examples and they are in the actual spreadsheets and equations)
So, my main source of confusion is coming from a number of companies that take on a lot of debt. I'll pick a simple example that shows the pattern I'm curious about, $AMCX
So, if we use the following balance sheet, pulling from cash and currently owed debt to come up with net cash...
..and then we forecast the earnings for the next 10 years rather optimistically (in my opinion) for a TV channel. The numbers are "random" in that they don't adhere to too much of a story, except that it makes the assumption "cable TV will be fine for the next 10 years but won't sustain any real growth."
(note that, off screen, I even estimated a 2% terminal value! To be honest, I think that a cable TV company would likely see a bigger drop than that, considering its 6% dip in net income FY15 to FY16 (even after the growth from FY14 to FY15)
But even with those assumptions, and the negative net cash (because debt) added (subtracted), we come up with a value of almost HALF of what the stock is trading at! If we remove the debt, on the other hand, the value JUMPS up to $68/share (only a few dollars higher than it's trading now). (also note that I'm estimating an 8% discount rate, strictly because I really do see the stock as being rather risky)
Moving on to a much better example (in my opinion), what if $AMCX grew its revenues by $10m/year for the next 10 years, and then succumbed to a terminal value of just 2%?
(also assuming an 8% discount rate, just to remain consistent) Same thing, still well below the current stock price, though just BARELY 80% of it (thus, arguably, discounted cash flow is "doing its job" but it's a completely unrealistic assumption, in my opinion)
And now on to my actual question:
My assumptions above are fairly unrealistic, I know. I also know that I can plug any value into npv to get it to give me the estimate that I want to see. I don't want to do this, but I keep running into company after company that has a lot of debt, and it throws my npv completely out of whack. When I remove long-term debt from the equation, and I'm truly honest with my predictions, I almost always hit a value that's pretty damn close to the actual trading price (or at least within a reasonable percentage of it). Fiddling with the discount rate, again, can get me the answer that I "want" to see, but I don't see that as good practice at all.
Should I just strictly avoid companies like this? Is there a certain level of "irrational exuberance" going on with companies like this (ie: look at $DIN's stock price mere months ago, factoring in the $1.2b in debt)? Or am I inputting the information incorrectly in the first place?
Any help would be appreciated, and I apologize if this isn't the right place to ask. I'm happy to post elsewhere.
Submitted July 21, 2017 at 08:37PM by PM_ME_YOUR_STOCKPIX http://ift.tt/2gREpf1
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