Intrinsic value of Cogent Communications Holdings - CCOI

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$43.85

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$43.85

 
Intrinsic value

$23.06

 
Up/down potential

-47%

 
Rating

sell

 
Value-price divergence* premium content

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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of CCOI stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2013), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 2.0

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2013(a)
   2014
   2015
   2016
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  9.78
  9.40
  8.96
  8.56
  8.21
  7.89
  7.60
  7.34
  7.10
  6.89
  6.70
  6.53
  6.38
  6.24
  6.12
  6.01
  5.91
  5.82
  5.73
  5.66
  5.59
  5.53
  5.48
  5.43
  5.39
  5.35
  5.32
  5.28
  5.26
  5.23
  5.21
Revenue, $m
  348
  381
  415
  450
  487
  526
  566
  607
  650
  695
  742
  790
  841
  893
  948
  1,005
  1,064
  1,126
  1,191
  1,258
  1,328
  1,402
  1,479
  1,559
  1,643
  1,731
  1,823
  1,919
  2,020
  2,126
  2,236
Variable operating expenses, $m
 
  197
  214
  233
  252
  272
  292
  314
  336
  359
  384
  409
  435
  462
  490
  519
  550
  582
  615
  650
  687
  725
  764
  806
  849
  895
  942
  992
  1,044
  1,099
  1,156
Fixed operating expenses, $m
 
  128
  131
  135
  138
  141
  145
  149
  152
  156
  160
  164
  168
  172
  177
  181
  186
  190
  195
  200
  205
  210
  215
  221
  226
  232
  238
  243
  250
  256
  262
Total operating expenses, $m
  302
  325
  345
  368
  390
  413
  437
  463
  488
  515
  544
  573
  603
  634
  667
  700
  736
  772
  810
  850
  892
  935
  979
  1,027
  1,075
  1,127
  1,180
  1,235
  1,294
  1,355
  1,418
Operating income, $m
  46
  56
  69
  83
  97
  113
  128
  145
  162
  180
  198
  218
  238
  259
  281
  304
  328
  354
  380
  408
  437
  467
  499
  532
  567
  604
  643
  684
  726
  771
  818
EBITDA, $m
  110
  126
  145
  166
  187
  209
  232
  256
  281
  307
  335
  363
  392
  423
  455
  489
  524
  561
  599
  639
  681
  725
  771
  819
  869
  922
  978
  1,036
  1,097
  1,162
  1,229
Interest expense (income), $m
  35
  31
  30
  33
  36
  40
  43
  47
  51
  55
  59
  63
  67
  72
  77
  82
  87
  93
  98
  104
  110
  117
  124
  131
  138
  146
  154
  162
  171
  181
  190
Earnings before tax, $m
  7
  24
  39
  50
  61
  73
  85
  98
  111
  125
  140
  155
  170
  187
  204
  222
  241
  261
  282
  303
  326
  350
  375
  402
  429
  458
  489
  521
  555
  590
  628
Tax expense, $m
  -50
  7
  11
  13
  17
  20
  23
  26
  30
  34
  38
  42
  46
  50
  55
  60
  65
  70
  76
  82
  88
  95
  101
  108
  116
  124
  132
  141
  150
  159
  169
Net income, $m
  57
  18
  29
  36
  45
  53
  62
  71
  81
  91
  102
  113
  124
  136
  149
  162
  176
  191
  206
  222
  238
  256
  274
  293
  313
  335
  357
  380
  405
  431
  458

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  305
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  755
  493
  537
  583
  630
  680
  732
  786
  841
  899
  960
  1,022
  1,088
  1,155
  1,226
  1,300
  1,377
  1,457
  1,540
  1,627
  1,718
  1,813
  1,913
  2,017
  2,125
  2,239
  2,358
  2,483
  2,613
  2,750
  2,893
Adjusted assets (=assets-cash), $m
  450
  493
  537
  583
  630
  680
  732
  786
  841
  899
  960
  1,022
  1,088
  1,155
  1,226
  1,300
  1,377
  1,457
  1,540
  1,627
  1,718
  1,813
  1,913
  2,017
  2,125
  2,239
  2,358
  2,483
  2,613
  2,750
  2,893
Revenue / Adjusted assets
  0.773
  0.773
  0.773
  0.772
  0.773
  0.774
  0.773
  0.772
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
  0.773
Average production assets, $m
  326
  357
  389
  422
  457
  493
  530
  569
  609
  651
  695
  740
  788
  837
  888
  941
  997
  1,055
  1,116
  1,179
  1,245
  1,313
  1,385
  1,461
  1,539
  1,622
  1,708
  1,798
  1,893
  1,992
  2,096
Working capital, $m
  210
  3
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  8
  9
  9
  10
  10
  11
  11
  12
  13
  13
  14
  15
  16
  16
  17
  18
  19
  20
Total debt, $m
  496
  377
  417
  458
  501
  546
  593
  641
  691
  743
  798
  854
  913
  974
  1,038
  1,104
  1,173
  1,245
  1,320
  1,399
  1,481
  1,566
  1,656
  1,749
  1,847
  1,949
  2,056
  2,169
  2,286
  2,409
  2,538
Total liabilities, $m
  562
  443
  483
  524
  567
  612
  659
  707
  757
  809
  864
  920
  979
  1,040
  1,104
  1,170
  1,239
  1,311
  1,386
  1,465
  1,547
  1,632
  1,722
  1,815
  1,913
  2,015
  2,122
  2,235
  2,352
  2,475
  2,604
Total equity, $m
  193
  49
  54
  58
  63
  68
  73
  79
  84
  90
  96
  102
  109
  116
  123
  130
  138
  146
  154
  163
  172
  181
  191
  202
  213
  224
  236
  248
  261
  275
  289
Total liabilities and equity, $m
  755
  492
  537
  582
  630
  680
  732
  786
  841
  899
  960
  1,022
  1,088
  1,156
  1,227
  1,300
  1,377
  1,457
  1,540
  1,628
  1,719
  1,813
  1,913
  2,017
  2,126
  2,239
  2,358
  2,483
  2,613
  2,750
  2,893
Debt-to-equity ratio
  2.570
  7.660
  7.770
  7.870
  7.950
  8.030
  8.100
  8.160
  8.220
  8.270
  8.310
  8.350
  8.390
  8.430
  8.460
  8.490
  8.520
  8.550
  8.570
  8.590
  8.620
  8.640
  8.650
  8.670
  8.690
  8.710
  8.720
  8.730
  8.750
  8.760
  8.770
Adjusted equity ratio
  -0.249
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  57
  18
  29
  36
  45
  53
  62
  71
  81
  91
  102
  113
  124
  136
  149
  162
  176
  191
  206
  222
  238
  256
  274
  293
  313
  335
  357
  380
  405
  431
  458
Depreciation, amort., depletion, $m
  64
  70
  76
  83
  90
  97
  104
  112
  119
  128
  136
  145
  154
  164
  174
  185
  195
  207
  219
  231
  244
  258
  272
  286
  302
  318
  335
  353
  371
  391
  411
Funds from operations, $m
  79
  88
  105
  119
  134
  150
  166
  183
  201
  219
  238
  258
  279
  301
  323
  347
  372
  397
  424
  453
  482
  513
  546
  580
  615
  653
  692
  733
  776
  822
  869
Change in working capital, $m
  -3
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
  1
Cash from operations, $m
  82
  102
  105
  119
  134
  149
  166
  183
  200
  219
  238
  258
  278
  300
  323
  346
  371
  397
  424
  452
  482
  513
  545
  579
  614
  652
  691
  732
  775
  821
  868
Maintenance CAPEX, $m
  0
  -64
  -70
  -76
  -83
  -90
  -97
  -104
  -112
  -119
  -128
  -136
  -145
  -154
  -164
  -174
  -185
  -195
  -207
  -219
  -231
  -244
  -258
  -272
  -286
  -302
  -318
  -335
  -353
  -371
  -391
New CAPEX, $m
  -49
  -31
  -32
  -33
  -35
  -36
  -37
  -39
  -40
  -42
  -44
  -45
  -47
  -49
  -51
  -53
  -56
  -58
  -60
  -63
  -66
  -69
  -72
  -75
  -79
  -82
  -86
  -90
  -95
  -99
  -104
Cash from investing activities, $m
  -49
  -95
  -102
  -109
  -118
  -126
  -134
  -143
  -152
  -161
  -172
  -181
  -192
  -203
  -215
  -227
  -241
  -253
  -267
  -282
  -297
  -313
  -330
  -347
  -365
  -384
  -404
  -425
  -448
  -470
  -495
Free cash flow, $m
  33
  8
  3
  9
  16
  24
  32
  40
  48
  57
  66
  76
  86
  96
  107
  119
  131
  143
  156
  170
  185
  200
  215
  232
  249
  268
  287
  307
  328
  350
  374
Issuance/(repayment) of debt, $m
  59
  -21
  40
  41
  43
  45
  47
  48
  50
  52
  54
  56
  59
  61
  64
  66
  69
  72
  75
  78
  82
  86
  89
  94
  98
  102
  107
  112
  117
  123
  129
Issuance/(repurchase) of shares, $m
  1
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  60
  -21
  40
  41
  43
  45
  47
  48
  50
  52
  54
  56
  59
  61
  64
  66
  69
  72
  75
  78
  82
  86
  89
  94
  98
  102
  107
  112
  117
  123
  129
Total cash flow (excl. dividends), $m
  93
  -13
  42
  51
  60
  69
  78
  88
  99
  109
  121
  132
  145
  158
  171
  185
  200
  215
  232
  249
  266
  285
  305
  325
  347
  370
  394
  419
  446
  473
  503
Retained Cash Flow (-), $m
  -33
  -63
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -10
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -14
  -14
Prev. year cash balance distribution, $m
 
  207
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  131
  38
  46
  55
  64
  73
  83
  93
  104
  115
  126
  138
  151
  164
  178
  192
  207
  223
  240
  257
  276
  295
  315
  336
  359
  382
  407
  433
  460
  488
Discount rate, %
 
  5.00
  5.25
  5.51
  5.79
  6.08
  6.38
  6.70
  7.04
  7.39
  7.76
  8.14
  8.55
  8.98
  9.43
  9.90
  10.39
  10.91
  11.46
  12.03
  12.63
  13.27
  13.93
  14.63
  15.36
  16.13
  16.93
  17.78
  18.67
  19.60
  20.58
PV of cash for distribution, $m
 
  125
  34
  39
  44
  47
  50
  53
  54
  55
  54
  53
  52
  49
  46
  43
  40
  36
  32
  28
  24
  20
  17
  14
  11
  9
  7
  5
  4
  3
  2
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

Cogent Communications Holdings, Inc., through its subsidiaries, provides high-speed Internet access and Internet protocol communications services primarily to small and medium-sized businesses, communications service providers, and other bandwidth-intensive organizations in North America, Europe, and Asia. The company offers on-net Internet access services to bandwidth-intensive users, such as universities, other Internet service providers, telephone companies, cable television companies, Web hosting companies, content delivery network companies, and commercial content and application service providers; and to corporate customers located in multi-tenant office buildings, including law firms, financial services firms, advertising and marketing firms, and other professional services businesses. It also provides its on-net services in carrier-neutral data centers, Cogent controlled data centers, and single-tenant office buildings. In addition, the company offers off-net services to businesses that are connected to its network primarily by means of ‘last mile’ access service lines obtained from other carriers primarily in the form of metropolitan Ethernet circuits. Further, it provides Internet connectivity to customers that are not located in buildings directly connected to the company’s network, as well as offers voice services. The company operates 52 data centers. Cogent Communications Holdings, Inc. was founded in 1999 and is headquartered in Washington, the District of Columbia.

FINANCIAL RATIOS  of  Cogent Communications Holdings (CCOI)

Valuation Ratios
P/E Ratio 36.4
Price to Sales 6
Price to Book 10.8
Price to Tangible Book
Price to Cash Flow 25.3
Price to Free Cash Flow 62.9
Growth Rates
Sales Growth Rate 9.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 11.4%
Cap. Spend. - 3 Yr. Gr. Rate -1.6%
Financial Strength
Quick Ratio 3
Current Ratio 0
LT Debt to Equity 206.2%
Total Debt to Equity 257%
Interest Coverage 1
Management Effectiveness
Return On Assets 50.2%
Ret/ On Assets - 3 Yr. Avg. 20.8%
Return On Total Capital 9.2%
Ret/ On T. Cap. - 3 Yr. Avg. 3.4%
Return On Equity 32.3%
Return On Equity - 3 Yr. Avg. 11.6%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 56.9%
Gross Margin - 3 Yr. Avg. 56%
EBITDA Margin 30.5%
EBITDA Margin - 3 Yr. Avg. 28.9%
Operating Margin 13.2%
Oper. Margin - 3 Yr. Avg. 11.7%
Pre-Tax Margin 2%
Pre-Tax Margin - 3 Yr. Avg. 0.9%
Net Profit Margin 16.4%
Net Profit Margin - 3 Yr. Avg. 5.9%
Effective Tax Rate -714.3%
Eff/ Tax Rate - 3 Yr. Avg. -249.2%
Payout Ratio 61.4%

CCOI stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the CCOI stock intrinsic value calculation we used $348 million for the last fiscal year's total revenue generated by Cogent Communications Holdings. The default revenue input number comes from 2013 income statement of Cogent Communications Holdings. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our CCOI stock valuation model: a) initial revenue growth rate of 9.4% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 5%, whose default value for CCOI is calculated based on our internal credit rating of Cogent Communications Holdings, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Cogent Communications Holdings.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of CCOI stock the variable cost ratio is equal to 51.7%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $125 million in the base year in the intrinsic value calculation for CCOI stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 7.9% for Cogent Communications Holdings.

Corporate tax rate of 27% is the nominal tax rate for Cogent Communications Holdings. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the CCOI stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for CCOI are equal to 93.7%.

Life of production assets of 5.1 years is the average useful life of capital assets used in Cogent Communications Holdings operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for CCOI is equal to 0.9%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $193 million for Cogent Communications Holdings - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 45.528 million for Cogent Communications Holdings is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Cogent Communications Holdings at the current share price and the inputted number of shares is $2.0 billion.


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Stock chart of CCOI Financial statements of CCOI
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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