Stock Analysis on Net

Synopsys Inc. (NASDAQ:SNPS)

Present Value of Free Cash Flow to Equity (FCFE) 

Microsoft Excel

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company asset base.


Intrinsic Stock Value (Valuation Summary)

Synopsys Inc., free cash flow to equity (FCFE) forecast

US$ in thousands, except per share data

Microsoft Excel
Year Value FCFEt or Terminal value (TVt) Calculation Present value at 15.13%
01 FCFE0 1,525,473
1 FCFE1 1,742,614 = 1,525,473 × (1 + 14.23%) 1,513,567
2 FCFE2 1,983,563 = 1,742,614 × (1 + 13.83%) 1,496,397
3 FCFE3 2,249,746 = 1,983,563 × (1 + 13.42%) 1,474,126
4 FCFE4 2,542,482 = 2,249,746 × (1 + 13.01%) 1,446,970
5 FCFE5 2,862,949 = 2,542,482 × (1 + 12.60%) 1,415,193
5 Terminal value (TV5) 127,502,214 = 2,862,949 × (1 + 12.60%) ÷ (15.13%12.60%) 63,026,009
Intrinsic value of Synopsys Inc. common stock 70,372,262
 
Intrinsic value of Synopsys Inc. common stock (per share) $462.72
Current share price $446.71

Based on: 10-K (reporting date: 2022-10-31).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.


Required Rate of Return (r)

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Assumptions
Rate of return on LT Treasury Composite1 RF 4.88%
Expected rate of return on market portfolio2 E(RM) 13.53%
Systematic risk of Synopsys Inc. common stock βSNPS 1.19
 
Required rate of return on Synopsys Inc. common stock3 rSNPS 15.13%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

2 See details »

3 rSNPS = RF + βSNPS [E(RM) – RF]
= 4.88% + 1.19 [13.53%4.88%]
= 15.13%


FCFE Growth Rate (g)

FCFE growth rate (g) implied by PRAT model

Synopsys Inc., PRAT model

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Average Oct 31, 2022 Oct 31, 2021 Oct 31, 2020 Oct 31, 2019 Oct 31, 2018 Oct 31, 2017
Selected Financial Data (US$ in thousands)
Net income attributed to Synopsys 984,594 757,516 664,347 532,367 432,518 136,563
Revenue 5,081,542 4,204,193 3,685,281 3,360,694 3,121,058 2,724,880
Total assets 9,418,087 8,752,260 8,030,062 6,405,160 6,145,974 5,396,414
Total Synopsys stockholders’ equity 5,515,725 5,295,137 4,907,404 4,083,013 3,479,152 3,275,620
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00 1.00
Profit margin2 19.38% 18.02% 18.03% 15.84% 13.86% 5.01%
Asset turnover3 0.54 0.48 0.46 0.52 0.51 0.50
Financial leverage4 1.71 1.65 1.64 1.57 1.77 1.65
Averages
Retention rate 1.00
Profit margin 17.02%
Asset turnover 0.50
Financial leverage 1.66
 
FCFE growth rate (g)5 14.23%

Based on: 10-K (reporting date: 2022-10-31), 10-K (reporting date: 2021-10-31), 10-K (reporting date: 2020-10-31), 10-K (reporting date: 2019-10-31), 10-K (reporting date: 2018-10-31), 10-K (reporting date: 2017-10-31).

2022 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income attributed to Synopsys ÷ Revenue
= 100 × 984,594 ÷ 5,081,542
= 19.38%

3 Asset turnover = Revenue ÷ Total assets
= 5,081,542 ÷ 9,418,087
= 0.54

4 Financial leverage = Total assets ÷ Total Synopsys stockholders’ equity
= 9,418,087 ÷ 5,515,725
= 1.71

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 17.02% × 0.50 × 1.66
= 14.23%


FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (67,937,362 × 15.13%1,525,473) ÷ (67,937,362 + 1,525,473)
= 12.60%

where:
Equity market value0 = current market value of Synopsys Inc. common stock (US$ in thousands)
FCFE0 = the last year Synopsys Inc. free cash flow to equity (US$ in thousands)
r = required rate of return on Synopsys Inc. common stock


FCFE growth rate (g) forecast

Synopsys Inc., H-model

Microsoft Excel
Year Value gt
1 g1 14.23%
2 g2 13.83%
3 g3 13.42%
4 g4 13.01%
5 and thereafter g5 12.60%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 14.23% + (12.60%14.23%) × (2 – 1) ÷ (5 – 1)
= 13.83%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 14.23% + (12.60%14.23%) × (3 – 1) ÷ (5 – 1)
= 13.42%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 14.23% + (12.60%14.23%) × (4 – 1) ÷ (5 – 1)
= 13.01%