My first step when evaluating an idea is to check in with my Investor's Business Daily tool. I like that publication's grading system for earnings-per-share and sales/margins/return-on-equity metrics -- it offers me an overview of the risk I might take by investing in a company. Shuffle Master currently rates about as high as you can get on both of these metrics, which has been the case for quite a while now. I used to own Shuffle Master some time ago; I found it thanks to William O'Neil's newspaper. Although I was immediately attracted to its ratings and growth rates, I sold the stock way too early.
Now we can look at a discounted valuation of future cash flows. I used the discounted cash flow calculator found at the Motley Fool Inside Value website, developed by David B. DuWaldt. (If you'd like to try it out, register for a free trial at no obligation.) This is a good tool to play around with various data and test different potential growth scenarios. I used many different combinations of numbers and discounting factors, trying to be as conservative as possible. Let's face it -- we don't know what the future will bring.
Let me give you one set of assumptions. After having checked around for analyst estimates, I believe it's reasonably likely that Shuffle Master will grow earnings 25% over the next five years. The five years after that, I bring it down to a single digit -- 9%. After the 10th year, all bets are off. So let's say it grows at 2% per year. My discount rate is at the upper end of the recommended range of rates for stocks with a capitalization of approximately $1 billion: 14%. The free cash flow for the trailing 12 months stands at about $39 million. The stock is trading at approximately $28 a share as I write this and has 35.18 million shares outstanding.
So what is its intrinsic value based on these assumptions?
It comes out to $27, according to the discount-calculator application. Changing the assumptions to more pessimistic numbers (such as higher discount rates) brings the figure lower, as you might imagine. What my little exercise suggests is that Shuffle Master may be overvalued right now. Those of you patient enough for a pullback could be rewarded down the line.
Gambling is very popular these days, with companies such as International Game Technology
Ante up for related Foolishness:
Not ready to fold? Take a gamble and post your opinion at the Shuffle Master discussion board.