Intrinsic value of Progress Software - PRGS

Previous Close

$37.05

  Intrinsic Value

$15.45

stock screener

  Rating & Target

str. sell

-58%

  Value-price divergence*

-81%

Previous close

$37.05

 
Intrinsic value

$15.45

 
Up/down potential

-58%

 
Rating

str. sell

 
Value-price divergence*

-81%

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

We calculate the intrinsic value of PRGS 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 2016), $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 1.8

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   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
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  7.14
  2.00
  2.30
  2.57
  2.81
  3.03
  3.23
  3.41
  3.57
  3.71
  3.84
  3.95
  4.06
  4.15
  4.24
  4.31
  4.38
  4.44
  4.50
  4.55
  4.59
  4.64
  4.67
  4.70
  4.73
  4.76
  4.78
  4.81
  4.83
  4.84
  4.86
Revenue, $m
  405
  413
  423
  433
  446
  459
  474
  490
  508
  526
  547
  568
  591
  616
  642
  670
  699
  730
  763
  798
  834
  873
  914
  957
  1,002
  1,050
  1,100
  1,153
  1,208
  1,267
  1,329
Variable operating expenses, $m
 
  396
  404
  414
  425
  437
  450
  465
  480
  497
  515
  507
  527
  549
  572
  597
  623
  651
  680
  711
  744
  778
  814
  853
  893
  936
  980
  1,028
  1,077
  1,129
  1,184
Fixed operating expenses, $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
Total operating expenses, $m
  435
  396
  404
  414
  425
  437
  450
  465
  480
  497
  515
  507
  527
  549
  572
  597
  623
  651
  680
  711
  744
  778
  814
  853
  893
  936
  980
  1,028
  1,077
  1,129
  1,184
Operating income, $m
  -30
  17
  18
  19
  21
  22
  24
  25
  27
  29
  32
  62
  64
  67
  70
  73
  76
  79
  83
  87
  91
  95
  99
  104
  109
  114
  119
  125
  131
  138
  144
EBITDA, $m
  10
  58
  59
  61
  62
  64
  66
  68
  71
  74
  76
  79
  83
  86
  90
  94
  98
  102
  107
  111
  117
  122
  128
  134
  140
  147
  154
  161
  169
  177
  186
Interest expense (income), $m
  3
  4
  4
  5
  5
  5
  6
  6
  7
  7
  8
  8
  9
  10
  10
  11
  12
  13
  14
  14
  15
  17
  18
  19
  20
  21
  23
  24
  26
  27
  29
Earnings before tax, $m
  -35
  13
  14
  15
  16
  17
  18
  19
  21
  22
  24
  53
  55
  57
  59
  62
  64
  67
  69
  72
  75
  78
  82
  85
  89
  93
  97
  101
  106
  110
  115
Tax expense, $m
  21
  3
  4
  4
  4
  5
  5
  5
  6
  6
  6
  14
  15
  15
  16
  17
  17
  18
  19
  19
  20
  21
  22
  23
  24
  25
  26
  27
  29
  30
  31
Net income, $m
  -56
  9
  10
  11
  11
  12
  13
  14
  15
  16
  17
  39
  40
  42
  43
  45
  47
  49
  51
  53
  55
  57
  60
  62
  65
  68
  71
  74
  77
  81
  84

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  250
  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
  515
  527
  540
  556
  573
  591
  611
  633
  656
  682
  709
  737
  768
  800
  835
  872
  910
  951
  995
  1,040
  1,088
  1,139
  1,193
  1,249
  1,309
  1,371
  1,437
  1,507
  1,580
  1,657
Adjusted assets (=assets-cash), $m
  505
  515
  527
  540
  556
  573
  591
  611
  633
  656
  682
  709
  737
  768
  800
  835
  872
  910
  951
  995
  1,040
  1,088
  1,139
  1,193
  1,249
  1,309
  1,371
  1,437
  1,507
  1,580
  1,657
Revenue / Adjusted assets
  0.802
  0.802
  0.803
  0.802
  0.802
  0.801
  0.802
  0.802
  0.803
  0.802
  0.802
  0.801
  0.802
  0.802
  0.803
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
  0.802
Average production assets, $m
  150
  153
  156
  160
  165
  170
  175
  181
  188
  195
  202
  210
  219
  228
  238
  248
  259
  270
  282
  295
  309
  323
  338
  354
  371
  388
  407
  427
  447
  469
  492
Working capital, $m
  132
  -105
  -107
  -110
  -113
  -117
  -120
  -124
  -129
  -134
  -139
  -144
  -150
  -156
  -163
  -170
  -178
  -185
  -194
  -203
  -212
  -222
  -232
  -243
  -255
  -267
  -279
  -293
  -307
  -322
  -337
Total debt, $m
  135
  126
  134
  143
  153
  164
  176
  190
  204
  220
  236
  254
  273
  293
  314
  337
  361
  387
  414
  442
  473
  504
  538
  573
  610
  650
  691
  734
  780
  828
  879
Total liabilities, $m
  348
  339
  347
  356
  366
  377
  389
  403
  417
  433
  449
  467
  486
  506
  527
  550
  574
  600
  627
  655
  686
  717
  751
  786
  823
  863
  904
  947
  993
  1,041
  1,092
Total equity, $m
  407
  176
  180
  184
  189
  195
  202
  208
  216
  224
  232
  242
  251
  262
  273
  285
  297
  310
  324
  339
  355
  371
  389
  407
  426
  446
  468
  490
  514
  539
  565
Total liabilities and equity, $m
  755
  515
  527
  540
  555
  572
  591
  611
  633
  657
  681
  709
  737
  768
  800
  835
  871
  910
  951
  994
  1,041
  1,088
  1,140
  1,193
  1,249
  1,309
  1,372
  1,437
  1,507
  1,580
  1,657
Debt-to-equity ratio
  0.332
  0.720
  0.750
  0.780
  0.810
  0.840
  0.880
  0.910
  0.950
  0.980
  1.020
  1.050
  1.090
  1.120
  1.150
  1.180
  1.220
  1.250
  1.280
  1.300
  1.330
  1.360
  1.380
  1.410
  1.430
  1.460
  1.480
  1.500
  1.520
  1.540
  1.560
Adjusted equity ratio
  0.311
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341
  0.341

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -56
  9
  10
  11
  11
  12
  13
  14
  15
  16
  17
  39
  40
  42
  43
  45
  47
  49
  51
  53
  55
  57
  60
  62
  65
  68
  71
  74
  77
  81
  84
Depreciation, amort., depletion, $m
  40
  41
  41
  41
  42
  42
  43
  43
  44
  44
  45
  18
  18
  19
  20
  21
  22
  23
  24
  25
  26
  27
  28
  30
  31
  33
  34
  36
  38
  39
  41
Funds from operations, $m
  102
  50
  51
  52
  53
  54
  56
  57
  59
  60
  62
  57
  59
  61
  63
  66
  69
  71
  74
  77
  81
  84
  88
  92
  96
  100
  105
  110
  115
  120
  126
Change in working capital, $m
  -1
  -2
  -2
  -3
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -16
Cash from operations, $m
  103
  52
  53
  55
  56
  58
  59
  61
  63
  65
  67
  62
  65
  67
  70
  73
  76
  79
  83
  86
  90
  94
  98
  103
  107
  112
  118
  123
  129
  135
  141
Maintenance CAPEX, $m
  0
  -13
  -13
  -13
  -13
  -14
  -14
  -15
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
  -28
  -30
  -31
  -33
  -34
  -36
  -38
  -39
New CAPEX, $m
  -6
  -3
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -14
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
Cash from investing activities, $m
  -21
  -16
  -17
  -17
  -18
  -19
  -19
  -21
  -21
  -23
  -23
  -25
  -27
  -27
  -29
  -30
  -32
  -33
  -35
  -37
  -39
  -40
  -42
  -44
  -47
  -49
  -52
  -54
  -57
  -60
  -62
Free cash flow, $m
  82
  37
  37
  38
  38
  39
  40
  40
  41
  42
  44
  37
  38
  40
  41
  43
  44
  46
  48
  50
  52
  54
  56
  58
  61
  64
  66
  69
  72
  76
  79
Issuance/(repayment) of debt, $m
  -9
  6
  8
  9
  10
  11
  12
  13
  14
  15
  17
  18
  19
  20
  21
  23
  24
  26
  27
  29
  30
  32
  34
  35
  37
  39
  41
  43
  46
  48
  51
Issuance/(repurchase) of shares, $m
  -69
  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  
  -82
  6
  8
  9
  10
  11
  12
  13
  14
  15
  17
  18
  19
  20
  21
  23
  24
  26
  27
  29
  30
  32
  34
  35
  37
  39
  41
  43
  46
  48
  51
Total cash flow (excl. dividends), $m
  -5
  43
  45
  46
  48
  50
  52
  54
  56
  58
  60
  55
  57
  60
  63
  65
  68
  72
  75
  78
  82
  86
  90
  94
  98
  103
  108
  113
  118
  124
  130
Retained Cash Flow (-), $m
  115
  -4
  -4
  -5
  -5
  -6
  -6
  -7
  -7
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -15
  -16
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -24
  -25
  -26
Prev. year cash balance distribution, $m
 
  235
  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
 
  274
  41
  42
  43
  44
  46
  47
  48
  50
  52
  46
  48
  50
  52
  54
  56
  58
  61
  63
  66
  69
  72
  76
  79
  83
  86
  90
  94
  99
  103
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  263
  37
  36
  35
  34
  33
  32
  30
  29
  27
  22
  20
  19
  17
  16
  14
  13
  11
  10
  8
  7
  6
  5
  4
  3
  3
  2
  1
  1
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Current shareholders' claim on cash, %
  100
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  100.0
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  100.0
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  100.0
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  100.0

Progress Software Corporation is engaged in application development. The Company operates through three segments: OpenEdge, Data Connectivity and Integration (DCI), and Application Development and Deployment (AppDev). The OpenEdge business segment provides the product enhancements and marketing support to its partner base. It is also focused on providing partners and direct end users with a path to develop and integrate cloud-based applications. Its solutions include Progress OpenEdge and Progress Corticon. The DCI segment is focused on its data assets, including the data integration components of its cloud offerings. Its solutions include Progress DataDirect Connect and Progress DataDirect Cloud. The AppDev business segment is focused on generating customers for its application development assets. Its solutions include Dev Tools, NativeScript, Dev Cloud, Telerik Platform, Test Studio, Sitefinity and Progress Rollbase. Its offerings span Web, mobile and data.

FINANCIAL RATIOS  of  Progress Software (PRGS)

Valuation Ratios
P/E Ratio -32.1
Price to Sales 4.4
Price to Book 4.4
Price to Tangible Book
Price to Cash Flow 17.5
Price to Free Cash Flow 18.5
Growth Rates
Sales Growth Rate 7.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate -33.3%
Cap. Spend. - 3 Yr. Gr. Rate 3.7%
Financial Strength
Quick Ratio 17
Current Ratio 0.1
LT Debt to Equity 29.5%
Total Debt to Equity 33.2%
Interest Coverage -11
Management Effectiveness
Return On Assets -6.3%
Ret/ On Assets - 3 Yr. Avg. -0.2%
Return On Total Capital -9.3%
Ret/ On T. Cap. - 3 Yr. Avg. -0.5%
Return On Equity -12.1%
Return On Equity - 3 Yr. Avg. -1.5%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 84%
Gross Margin - 3 Yr. Avg. 85.5%
EBITDA Margin 2%
EBITDA Margin - 3 Yr. Avg. 15%
Operating Margin -7.4%
Oper. Margin - 3 Yr. Avg. 7%
Pre-Tax Margin -8.6%
Pre-Tax Margin - 3 Yr. Avg. 6%
Net Profit Margin -13.8%
Net Profit Margin - 3 Yr. Avg. -0.5%
Effective Tax Rate -60%
Eff/ Tax Rate - 3 Yr. Avg. 50.7%
Payout Ratio 0%

PRGS stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the PRGS stock intrinsic value calculation we used $405 million for the last fiscal year's total revenue generated by Progress Software. The default revenue input number comes from 2016 income statement of Progress Software. 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 PRGS stock valuation model: a) initial revenue growth rate of 2% 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 4.3%, whose default value for PRGS is calculated based on our internal credit rating of Progress Software, 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 Progress Software.
    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 PRGS stock the variable cost ratio is equal to 96%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for PRGS 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 3.5% for Progress Software.

Corporate tax rate of 27% is the nominal tax rate for Progress Software. 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 PRGS 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 PRGS are equal to 37%.

Life of production assets of 11.9 years is the average useful life of capital assets used in Progress Software 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 PRGS is equal to -25.4%. 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 - $407 million for Progress Software - 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 48.036 million for Progress Software 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 Progress Software at the current share price and the inputted number of shares is $1.8 billion.

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COMPANY NEWS

▶ 3 Stocks That Just Increased Their Dividends   [Sep-22-17 11:46AM  Motley Fool]
▶ Activist investor to Progress Software: 'Were not going away'   [Sep-20-17 12:15PM  American City Business Journals]
▶ Stocks With Rising Relative Price Strength: Progress Software   [03:00AM  Investor's Business Daily]
▶ Top Ranked Momentum Stocks to Buy for July 19th   [Jul-19-17 09:52AM  Zacks]
▶ Why Is the Software Market So Hot Right Now?   [Jul-14-17 01:45PM  Zacks]
▶ Progress Software posts 2Q profit   [Jun-28-17 09:30PM  Associated Press]
▶ Progress Honors 2016 Global Partner Awards Winners   [May-23-17 05:00AM  Business Wire]
▶ Progress Software's Uncertain Ride Continues   [Apr-05-17 08:30AM  Investopedia]
▶ Progress Software reports 1Q loss   [05:08PM  Associated Press]
▶ Progress Announces ProgressNEXT 2017 Partner Conference   [Feb-06-17 04:00AM  Business Wire]
▶ Bedford software firm laying off hundreds of employees   [Feb-02-17 03:35PM  at bizjournals.com]
Financial statements of PRGS
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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