Consumer Durables News

Estimating The Fair Value Of Century Communities, Inc. (NYSE:CCS)


Key Insights

  • Century Communities’ estimated fair value is US$44.0 based on 2 Stage Free Cash Flow to Equity
  • Current share price of US$51.2 suggests Century Communities is trading close to its fair value
  • Analyst price target for CCS is US$55.67 which is 26% above our fair value estimate

Does the January share price for Century Communities, Inc. (NYSE:CCS) reflect what it’s really worth? Today, we will estimate the stock’s intrinsic value by estimating the company’s future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they’re fairly easy to follow.

We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Century Communities

Is Century Communities Fairly Valued?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today’s dollars:

10-year free cash flow (FCF) forecast

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Levered FCF ($, Millions) US$740.0m US$301.0m US$139.6m US$88.1m US$65.8m US$54.6m US$48.4m US$44.8m US$42.8m US$41.7m
Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ -53.61% Est @ -36.93% Est @ -25.26% Est @ -17.09% Est @ -11.37% Est @ -7.36% Est @ -4.56% Est @ -2.60%
Present Value ($, Millions) Discounted @ 11% US$669 US$246 US$103 US$58.7 US$39.6 US$29.7 US$23.8 US$19.9 US$17.2 US$15.1

(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.2b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today’s value at a cost of equity of 11%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = US$42m× (1 + 2.0%) ÷ (11%– 2.0%) = US$489m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$489m÷ ( 1 + 11%)10= US$177m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$1.4b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$51.2, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula – garbage in, garbage out.

NYSE:CCS Discounted Cash Flow January 4th 2023

The 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 these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at Century Communities as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 11%, which is based on a levered beta of 1.561. Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

SWOT Analysis for Century Communities

Strength

  • Earnings growth over the past year exceeded the industry.
  • Debt is well covered by earnings.
Weakness

  • Earnings growth over the past year is below its 5-year average.
  • Dividend is low compared to the top 25% of dividend payers in the Consumer Durables market.
Opportunity

  • Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat

  • Debt is not well covered by operating cash flow.
  • Paying a dividend but company has no free cash flows.
  • Annual earnings are forecast to decline for the next 3 years.

Looking Ahead:

Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to “what assumptions need to be true for this stock to be under/overvalued?” If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Century Communities, there are three essential items you should look at:

  1. Risks: We feel that you should assess the 4 warning signs for Century Communities (3 are concerning!) we’ve flagged before making an investment in the company.
  2. Management:Have insiders been ramping up their shares to take advantage of the market’s sentiment for CCS’s future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.

Valuation is complex, but we’re helping make it simple.

Find out whether Century Communities is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.



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