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Calculating The Fair Value Of Verint Systems Inc (NASDAQ:VRNT)

How far off is Verint Systems Inc (NASDAQ:VRNT) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the foreast future cash flows of the company and discounting them back to today’s value. This is done using the Discounted Cash Flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not June 2018 then I highly recommend you check out the latest calculation for Verint Systems by following the link below. View out our latest analysis for Verint Systems

What’s the value?

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 start off with we need to estimate the next five years of cash flows. Where possible I use analyst estimates, but when these aren’t available I have extrapolated the previous free cash flow (FCF) from the year before. For this growth rate I used the average annual growth rate over the past five years, but capped at a reasonable level. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

2018

2019

2020

2021

2022

Levered FCF ($, Millions)

$165.65

$199.60

$214.37

$223.10

$232.18

Source

Analyst x2

Analyst x3

Analyst x3

Extrapolated @ (4.07%)

Extrapolated @ (4.07%)

Present Value Discounted @ 10.88%

$149.40

$162.36

$157.26

$147.61

$138.55

Present Value of 5-year Cash Flow (PVCF)= US$755.17m

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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. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 10.9%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$232.18m × (1 + 2.9%) ÷ (10.9% – 2.9%) = US$3.01b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$3.01b ÷ ( 1 + 10.9%)5 = US$1.80b

The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is US$2.55b. The last step is to then 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) then we use the equivalent number. This results in an intrinsic value of $39.9. Compared to the current share price of $45.1, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

NasdaqGS:VRNT Intrinsic Value June 23rd 18
NasdaqGS:VRNT Intrinsic Value June 23rd 18

Important assumptions

Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Verint Systems 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 10.9%, which is based on a levered beta of 1.125. 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:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company.

For VRNT, I’ve compiled three relevant factors you should further examine:

  1. Financial Health: Does VRNT 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 VRNT’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: Are there other high quality stocks you could be holding instead of VRNT? 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 NASDAQ every 6 hours. If you want to find the calculation for other stocks just search here.


To help readers see pass 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.