Key Insights:
The projected fair value for Copart is US$39.84 based on 2 Stage Free Cash Flow to Equity. Copart’s US$53.52 share price indicates that it might be 34% overvalued. Analyst price target for CPRT is US$57.37, which is 44% above our fair value estimate.
How far off is Copart, Inc. (NASDAQ:CPRT) from its intrinsic value? Using the most recent financial data, we’ll take a look at whether the stock is fairly priced by projecting its future cash flows and then discounting them to today’s value. We will use the Discounted Cash Flow (DCF) model on this occasion.
Companies can be valued in various ways, and a DCF is not perfect for every situation. For those interested in equity analysis, the Simply Wall St analysis model may be of interest.
We use a 2-stage model, with different growth rates for the company’s cash flows over two periods. We estimate the next ten years of cash flows, using analyst estimates or extrapolating previous free cash flow. A DCF considers that a dollar in the future is less valuable than a dollar today, so we discount future cash flows to today’s value.
The total value, or equity value, is the sum of the present value of future cash flows, which in this case is US$38 billion. Compared to the current share price of US$53.5, the company appears potentially overvalued at the time of writing.
The DCF calculation heavily relies on two assumptions: the discount rate and the cash flows. The DCF does not consider the cyclicality of an industry or a company’s future capital requirements. The cost of equity is used as the discount rate, and in this case, we’ve used 6.5%.
Next Steps:
While company valuation is important, it is just one factor to consider. The DCF model is a guide to understanding what assumptions need to be true for a stock to be under/overvalued. It is essential to analyze other factors like risks, management, and alternative investment options.
Disclaimer: This article by Simply Wall St is based on historical data and analyst forecasts using an unbiased methodology. It does not constitute financial advice or a recommendation to buy or sell any stock. Simply Wall St has no position in any stocks mentioned.