Intrinsic value of Westwood Holdings Group - WHG

Previous Close

$58.97

  Intrinsic Value

$177.09

stock screener

  Rating & Target

str. buy

+200%

  Value-price divergence*

-59%

Previous close

$58.97

 
Intrinsic value

$177.09

 
Up/down potential

+200%

 
Rating

str. buy

 
Value-price divergence*

-59%

Our model is not good at valuating stocks of financial companies, such as WHG.

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

We calculate the intrinsic value of WHG 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 0.5

 

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, %
  -6.11
  13.80
  12.92
  12.13
  11.42
  10.77
  10.20
  9.68
  9.21
  8.79
  8.41
  8.07
  7.76
  7.49
  7.24
  7.01
  6.81
  6.63
  6.47
  6.32
  6.19
  6.07
  5.96
  5.87
  5.78
  5.70
  5.63
  5.57
  5.51
  5.46
  5.41
Revenue, $m
  123
  140
  158
  177
  197
  219
  241
  264
  289
  314
  340
  368
  397
  426
  457
  489
  522
  557
  593
  631
  670
  710
  753
  797
  843
  891
  941
  993
  1,048
  1,105
  1,165
Variable operating expenses, $m
 
  19
  21
  23
  26
  28
  31
  33
  36
  39
  42
  43
  46
  49
  53
  57
  61
  65
  69
  73
  78
  82
  87
  92
  98
  103
  109
  115
  122
  128
  135
Fixed operating expenses, $m
 
  75
  77
  79
  81
  83
  85
  87
  89
  91
  93
  96
  98
  101
  103
  106
  108
  111
  114
  117
  120
  123
  126
  129
  132
  135
  139
  142
  146
  149
  153
Total operating expenses, $m
  89
  94
  98
  102
  107
  111
  116
  120
  125
  130
  135
  139
  144
  150
  156
  163
  169
  176
  183
  190
  198
  205
  213
  221
  230
  238
  248
  257
  268
  277
  288
Operating income, $m
  34
  46
  60
  75
  91
  108
  126
  144
  164
  184
  205
  229
  252
  276
  301
  327
  353
  381
  410
  441
  472
  505
  540
  575
  613
  652
  693
  736
  781
  828
  877
EBITDA, $m
  37
  51
  65
  80
  96
  113
  131
  150
  170
  190
  212
  234
  257
  281
  306
  332
  360
  388
  417
  448
  480
  514
  548
  585
  623
  663
  704
  748
  793
  841
  891
Interest expense (income), $m
  0
  0
  0
  0
  1
  1
  1
  1
  1
  2
  2
  2
  2
  3
  3
  3
  4
  4
  4
  5
  5
  5
  6
  6
  7
  7
  7
  8
  8
  9
  10
Earnings before tax, $m
  34
  46
  60
  75
  91
  107
  125
  143
  162
  182
  203
  227
  250
  273
  298
  323
  350
  377
  406
  436
  467
  500
  534
  569
  606
  645
  686
  728
  772
  819
  867
Tax expense, $m
  11
  12
  16
  20
  24
  29
  34
  39
  44
  49
  55
  61
  67
  74
  80
  87
  94
  102
  110
  118
  126
  135
  144
  154
  164
  174
  185
  197
  209
  221
  234
Net income, $m
  23
  34
  44
  55
  66
  78
  91
  104
  118
  133
  148
  166
  182
  200
  217
  236
  255
  276
  297
  318
  341
  365
  390
  416
  443
  471
  501
  531
  564
  598
  633

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  90
  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
  180
  102
  116
  130
  144
  160
  176
  193
  211
  230
  249
  269
  290
  312
  334
  358
  382
  407
  434
  461
  490
  520
  551
  583
  617
  652
  688
  727
  767
  809
  852
Adjusted assets (=assets-cash), $m
  90
  102
  116
  130
  144
  160
  176
  193
  211
  230
  249
  269
  290
  312
  334
  358
  382
  407
  434
  461
  490
  520
  551
  583
  617
  652
  688
  727
  767
  809
  852
Revenue / Adjusted assets
  1.367
  1.373
  1.362
  1.362
  1.368
  1.369
  1.369
  1.368
  1.370
  1.365
  1.365
  1.368
  1.369
  1.365
  1.368
  1.366
  1.366
  1.369
  1.366
  1.369
  1.367
  1.365
  1.367
  1.367
  1.366
  1.367
  1.368
  1.366
  1.366
  1.366
  1.367
Average production assets, $m
  25
  28
  32
  36
  40
  44
  49
  54
  59
  64
  69
  75
  80
  87
  93
  99
  106
  113
  120
  128
  136
  144
  153
  162
  171
  181
  191
  202
  213
  224
  237
Working capital, $m
  86
  -5
  -5
  -6
  -7
  -7
  -8
  -9
  -10
  -10
  -11
  -12
  -13
  -14
  -15
  -16
  -17
  -18
  -20
  -21
  -22
  -23
  -25
  -26
  -28
  -29
  -31
  -33
  -35
  -36
  -38
Total debt, $m
  0
  5
  10
  15
  21
  26
  33
  39
  46
  53
  60
  68
  76
  84
  92
  101
  110
  120
  130
  140
  151
  162
  174
  186
  199
  212
  226
  241
  256
  272
  288
Total liabilities, $m
  34
  39
  44
  49
  55
  60
  67
  73
  80
  87
  94
  102
  110
  118
  126
  135
  144
  154
  164
  174
  185
  196
  208
  220
  233
  246
  260
  275
  290
  306
  322
Total equity, $m
  146
  64
  72
  81
  90
  100
  110
  120
  131
  143
  155
  167
  180
  194
  208
  223
  238
  253
  270
  287
  305
  323
  342
  363
  383
  405
  428
  452
  477
  503
  530
Total liabilities and equity, $m
  180
  103
  116
  130
  145
  160
  177
  193
  211
  230
  249
  269
  290
  312
  334
  358
  382
  407
  434
  461
  490
  519
  550
  583
  616
  651
  688
  727
  767
  809
  852
Debt-to-equity ratio
  0.000
  0.070
  0.130
  0.190
  0.230
  0.270
  0.300
  0.330
  0.350
  0.370
  0.390
  0.400
  0.420
  0.430
  0.440
  0.450
  0.460
  0.470
  0.480
  0.490
  0.500
  0.500
  0.510
  0.510
  0.520
  0.520
  0.530
  0.530
  0.540
  0.540
  0.540
Adjusted equity ratio
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622
  0.622

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  23
  34
  44
  55
  66
  78
  91
  104
  118
  133
  148
  166
  182
  200
  217
  236
  255
  276
  297
  318
  341
  365
  390
  416
  443
  471
  501
  531
  564
  598
  633
Depreciation, amort., depletion, $m
  3
  4
  5
  5
  5
  5
  6
  6
  6
  6
  7
  4
  5
  5
  5
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
  10
  11
  12
  12
  13
  14
Funds from operations, $m
  53
  38
  48
  60
  71
  84
  97
  110
  124
  139
  155
  170
  187
  205
  223
  242
  262
  282
  303
  326
  349
  373
  399
  425
  453
  481
  512
  543
  576
  611
  647
Change in working capital, $m
  6
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
Cash from operations, $m
  47
  39
  49
  60
  72
  84
  97
  111
  125
  140
  156
  171
  188
  206
  224
  243
  263
  283
  305
  327
  350
  375
  400
  426
  454
  483
  513
  545
  578
  613
  649
Maintenance CAPEX, $m
  0
  -1
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -5
  -5
  -5
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -12
  -12
  -13
New CAPEX, $m
  -2
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
Cash from investing activities, $m
  -2
  -4
  -6
  -6
  -6
  -6
  -8
  -8
  -8
  -8
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -18
  -20
  -20
  -22
  -23
  -24
  -25
Free cash flow, $m
  45
  34
  44
  54
  66
  78
  90
  103
  117
  132
  147
  162
  178
  195
  213
  231
  250
  270
  291
  312
  335
  359
  383
  409
  435
  463
  493
  523
  555
  589
  624
Issuance/(repayment) of debt, $m
  0
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  17
Issuance/(repurchase) of shares, $m
  -6
  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  
  -16
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  8
  8
  8
  9
  9
  9
  10
  10
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  17
Total cash flow (excl. dividends), $m
  30
  38
  49
  60
  71
  84
  96
  110
  124
  139
  154
  169
  186
  203
  221
  240
  259
  280
  301
  323
  346
  370
  395
  421
  448
  477
  506
  538
  570
  604
  640
Retained Cash Flow (-), $m
  -12
  -8
  -8
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -12
  -13
  -14
  -14
  -15
  -15
  -16
  -16
  -17
  -18
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -26
  -27
Prev. year cash balance distribution, $m
 
  90
  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
 
  121
  41
  51
  62
  74
  86
  99
  113
  127
  142
  157
  173
  190
  207
  225
  244
  264
  284
  306
  328
  351
  375
  401
  427
  455
  484
  514
  545
  578
  613
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
 
  116
  37
  44
  51
  57
  63
  67
  71
  73
  74
  74
  74
  72
  70
  66
  62
  57
  52
  47
  42
  36
  31
  26
  22
  18
  14
  11
  8
  6
  5
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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Westwood Holdings Group, Inc., through its subsidiaries, manages investment assets and provides services for its clients. The company operates in two segments, Advisory and Trust. The Advisory segment provides investment advisory services to corporate retirement plans, public retirement plans, endowments, foundations, individuals, and the Westwood Funds; and investment sub-advisory services to mutual funds, pooled investment vehicles, and its Trust segment. The Trust segment offers trust and custodial services; and participates in common trust funds that it sponsors to institutions and high net worth individuals. Westwood Holdings Group, Inc. was founded in 1983 and is based in Dallas, Texas.

FINANCIAL RATIOS  of  Westwood Holdings Group (WHG)

Valuation Ratios
P/E Ratio 22.6
Price to Sales 4.2
Price to Book 3.6
Price to Tangible Book
Price to Cash Flow 11.1
Price to Free Cash Flow 11.5
Growth Rates
Sales Growth Rate -6.1%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 100%
Cap. Spend. - 3 Yr. Gr. Rate 14.9%
Financial Strength
Quick Ratio NaN
Current Ratio 0.1
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 12.7%
Ret/ On Assets - 3 Yr. Avg. 16.9%
Return On Total Capital 16.4%
Ret/ On T. Cap. - 3 Yr. Avg. 21.9%
Return On Equity 16.4%
Return On Equity - 3 Yr. Avg. 21.9%
Asset Turnover 0.7
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 30.1%
EBITDA Margin - 3 Yr. Avg. 34.2%
Operating Margin 27.6%
Oper. Margin - 3 Yr. Avg. 32.3%
Pre-Tax Margin 27.6%
Pre-Tax Margin - 3 Yr. Avg. 32.3%
Net Profit Margin 18.7%
Net Profit Margin - 3 Yr. Avg. 21.1%
Effective Tax Rate 32.4%
Eff/ Tax Rate - 3 Yr. Avg. 34.6%
Payout Ratio 82.6%

WHG stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the WHG stock intrinsic value calculation we used $123 million for the last fiscal year's total revenue generated by Westwood Holdings Group. The default revenue input number comes from 2016 income statement of Westwood Holdings Group. 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 WHG stock valuation model: a) initial revenue growth rate of 13.8% 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 WHG is calculated based on our internal credit rating of Westwood Holdings Group, 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 Westwood Holdings Group.
    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 WHG stock the variable cost ratio is equal to 13.8%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $73 million in the base year in the intrinsic value calculation for WHG 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 Westwood Holdings Group.

Corporate tax rate of 27% is the nominal tax rate for Westwood Holdings Group. 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 WHG 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 WHG are equal to 20.3%.

Life of production assets of 17.3 years is the average useful life of capital assets used in Westwood Holdings Group 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 WHG is equal to -3.3%. 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 - $146 million for Westwood Holdings Group - 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 8.23 million for Westwood Holdings Group 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 Westwood Holdings Group at the current share price and the inputted number of shares is $0.5 billion.

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COMPANY NEWS

▶ Westwood Holdings posts 2Q profit   [Jul-27-17 02:56PM  Associated Press]
▶ Westwood Trust Launches Select Equity Tax Managed Strategy   [May-04-17 06:02PM  GlobeNewswire]
▶ Westwood Holdings posts 1Q profit   [Apr-26-17 06:34PM  Associated Press]
▶ Westwood Holdings posts 4Q profit   [05:18PM  Associated Press]
▶ Westwood Funds Launches Low Volatility Equity Fund   [Jan-05-17 03:45PM  GlobeNewswire]
▶ [$$] More Companies Are Choosing a Sale Over an IPO   [Jul-31-16 08:42PM  at The Wall Street Journal]
▶ [$$] East Coast Snowstorm Boosts Natural-Gas Producers   [Jan-22-16 04:46PM  at The Wall Street Journal]
Stock chart of WHG Financial statements of WHG
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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