Intrinsic value of Westwood Holdings Group - WHG

Previous Close

$65.57

  Intrinsic Value

$117.54

stock screener

  Rating & Target

str. buy

+79%

Previous close

$65.57

 
Intrinsic value

$117.54

 
Up/down potential

+79%

 
Rating

str. buy

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

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 0.6

 

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
  9.70
  9.23
  8.81
  8.43
  8.08
  7.78
  7.50
  7.25
  7.02
  6.82
  6.64
  6.47
  6.33
  6.19
  6.08
  5.97
  5.87
  5.78
  5.71
  5.63
  5.57
  5.51
  5.46
  5.42
  5.37
  5.34
  5.30
  5.27
  5.25
  5.22
Revenue, $m
  123
  135
  147
  160
  174
  188
  203
  218
  234
  250
  267
  285
  303
  322
  342
  363
  385
  407
  431
  455
  481
  508
  536
  565
  596
  628
  661
  696
  733
  772
  812
Variable operating expenses, $m
 
  18
  20
  21
  23
  25
  26
  28
  30
  32
  34
  33
  35
  37
  40
  42
  45
  47
  50
  53
  56
  59
  62
  66
  69
  73
  77
  81
  85
  90
  94
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
  93
  97
  100
  104
  108
  111
  115
  119
  123
  127
  129
  133
  138
  143
  148
  153
  158
  164
  170
  176
  182
  188
  195
  201
  208
  216
  223
  231
  239
  247
Operating income, $m
  34
  42
  51
  60
  70
  81
  92
  103
  115
  127
  140
  156
  170
  184
  199
  215
  232
  249
  267
  286
  306
  326
  348
  371
  395
  420
  446
  473
  502
  533
  565
EBITDA, $m
  37
  46
  55
  65
  75
  86
  97
  108
  120
  133
  146
  159
  173
  188
  203
  219
  236
  254
  272
  291
  311
  332
  354
  377
  402
  427
  454
  482
  511
  542
  574
Interest expense (income), $m
  0
  0
  0
  0
  0
  0
  1
  1
  1
  1
  1
  1
  2
  2
  2
  2
  2
  3
  3
  3
  3
  3
  4
  4
  4
  5
  5
  5
  6
  6
  6
Earnings before tax, $m
  34
  42
  51
  60
  70
  80
  91
  102
  114
  126
  139
  154
  168
  183
  197
  213
  229
  246
  264
  283
  302
  323
  344
  367
  390
  415
  441
  468
  497
  527
  558
Tax expense, $m
  11
  11
  14
  16
  19
  22
  25
  28
  31
  34
  37
  42
  45
  49
  53
  58
  62
  67
  71
  76
  82
  87
  93
  99
  105
  112
  119
  126
  134
  142
  151
Net income, $m
  23
  30
  37
  44
  51
  59
  66
  75
  83
  92
  101
  113
  123
  133
  144
  156
  167
  180
  193
  207
  221
  236
  251
  268
  285
  303
  322
  342
  363
  385
  408

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
  99
  108
  117
  127
  137
  148
  159
  171
  183
  195
  208
  222
  236
  250
  266
  281
  298
  315
  333
  352
  372
  392
  413
  436
  459
  484
  509
  536
  564
  594
Adjusted assets (=assets-cash), $m
  90
  99
  108
  117
  127
  137
  148
  159
  171
  183
  195
  208
  222
  236
  250
  266
  281
  298
  315
  333
  352
  372
  392
  413
  436
  459
  484
  509
  536
  564
  594
Revenue / Adjusted assets
  1.367
  1.364
  1.361
  1.368
  1.370
  1.372
  1.372
  1.371
  1.368
  1.366
  1.369
  1.370
  1.365
  1.364
  1.368
  1.365
  1.370
  1.366
  1.368
  1.366
  1.366
  1.366
  1.367
  1.368
  1.367
  1.368
  1.366
  1.367
  1.368
  1.369
  1.367
Average production assets, $m
  25
  27
  30
  33
  35
  38
  41
  44
  47
  51
  54
  58
  62
  65
  69
  74
  78
  83
  87
  92
  98
  103
  109
  115
  121
  127
  134
  141
  149
  157
  165
Working capital, $m
  86
  -4
  -5
  -5
  -6
  -6
  -7
  -7
  -8
  -8
  -9
  -9
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -15
  -16
  -17
  -18
  -19
  -20
  -21
  -22
  -23
  -24
  -25
  -27
Total debt, $m
  0
  3
  7
  10
  14
  18
  22
  26
  31
  35
  40
  45
  50
  55
  61
  66
  72
  79
  85
  92
  99
  106
  114
  122
  131
  140
  149
  159
  169
  179
  191
Total liabilities, $m
  34
  37
  41
  44
  48
  52
  56
  60
  65
  69
  74
  79
  84
  89
  95
  100
  106
  113
  119
  126
  133
  140
  148
  156
  165
  174
  183
  193
  203
  213
  225
Total equity, $m
  146
  61
  67
  73
  79
  86
  92
  99
  106
  114
  121
  130
  138
  147
  156
  165
  175
  185
  196
  207
  219
  231
  244
  257
  271
  286
  301
  317
  334
  351
  369
Total liabilities and equity, $m
  180
  98
  108
  117
  127
  138
  148
  159
  171
  183
  195
  209
  222
  236
  251
  265
  281
  298
  315
  333
  352
  371
  392
  413
  436
  460
  484
  510
  537
  564
  594
Debt-to-equity ratio
  0.000
  0.050
  0.100
  0.140
  0.180
  0.210
  0.240
  0.260
  0.290
  0.310
  0.330
  0.350
  0.360
  0.380
  0.390
  0.400
  0.410
  0.420
  0.430
  0.440
  0.450
  0.460
  0.470
  0.480
  0.480
  0.490
  0.490
  0.500
  0.510
  0.510
  0.520
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
  30
  37
  44
  51
  59
  66
  75
  83
  92
  101
  113
  123
  133
  144
  156
  167
  180
  193
  207
  221
  236
  251
  268
  285
  303
  322
  342
  363
  385
  408
Depreciation, amort., depletion, $m
  3
  4
  4
  5
  5
  5
  5
  5
  5
  6
  6
  3
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  7
  8
  8
  9
  9
  10
Funds from operations, $m
  53
  35
  41
  49
  56
  64
  72
  80
  89
  98
  107
  116
  126
  137
  148
  160
  172
  185
  198
  212
  226
  242
  258
  274
  292
  310
  330
  350
  371
  394
  417
Change in working capital, $m
  6
  0
  0
  0
  0
  0
  0
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -1
Cash from operations, $m
  47
  35
  42
  49
  56
  64
  72
  80
  89
  98
  108
  117
  127
  138
  149
  160
  173
  185
  199
  213
  227
  243
  259
  275
  293
  311
  331
  351
  372
  395
  418
Maintenance CAPEX, $m
  0
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -9
  -9
New CAPEX, $m
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -8
Cash from investing activities, $m
  -2
  -3
  -5
  -5
  -5
  -5
  -5
  -5
  -6
  -6
  -6
  -7
  -7
  -8
  -8
  -8
  -8
  -10
  -10
  -10
  -10
  -11
  -12
  -12
  -13
  -14
  -14
  -15
  -15
  -17
  -17
Free cash flow, $m
  45
  31
  38
  45
  52
  59
  67
  75
  83
  92
  101
  110
  120
  130
  141
  152
  164
  176
  189
  203
  217
  231
  247
  263
  280
  298
  317
  336
  357
  378
  401
Issuance/(repayment) of debt, $m
  0
  3
  3
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
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
  3
  3
  4
  4
  4
  4
  4
  4
  5
  5
  5
  5
  5
  6
  6
  6
  6
  7
  7
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
  11
Total cash flow (excl. dividends), $m
  30
  35
  41
  48
  55
  63
  71
  79
  88
  97
  106
  115
  125
  136
  147
  158
  170
  183
  196
  209
  224
  239
  255
  271
  289
  307
  326
  346
  367
  389
  412
Retained Cash Flow (-), $m
  -12
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -15
  -15
  -16
  -17
  -18
  -18
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
 
  119
  36
  42
  49
  57
  64
  72
  80
  89
  98
  107
  117
  127
  137
  149
  160
  172
  185
  198
  212
  227
  242
  258
  275
  292
  311
  330
  350
  372
  394
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
 
  114
  33
  37
  41
  44
  47
  49
  50
  51
  51
  51
  50
  48
  46
  44
  41
  37
  34
  31
  27
  23
  20
  17
  14
  11
  9
  7
  5
  4
  3
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
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Westwood Holdings Group, Inc. (Westwood) is a holding company. The Company operates through two segments: Advisory and Trust. The Company, through its subsidiaries, manages investment assets and provides services for its clients. Its subsidiaries include Westwood Management Corp. and Westwood Advisors, LLC (together, Westwood Management), Westwood International Advisors Inc. (Westwood International) and Westwood Trust. The Company's advisory segment includes Westwood Management and Westwood International, and encompasses three distinct investment teams: the United States Value Team, the Global Convertible Securities Team, and the Global and Emerging Markets Equity Team. The Company, through Westwood Trust, provides fiduciary and investment services to high net worth individuals and families, non-profit endowments and foundations, public and private retirement plans and individual retirement accounts (IRAs).

FINANCIAL RATIOS  of  Westwood Holdings Group (WHG)

Valuation Ratios
P/E Ratio 25.1
Price to Sales 4.7
Price to Book 4
Price to Tangible Book
Price to Cash Flow 12.3
Price to Free Cash Flow 12.8
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 9.7% 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 8.893 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 $0.6 billion.

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COMPANY NEWS

▶ Top Dividend Yielding Stocks To Profit From   [08:02AM  Simply Wall St.]
▶ Westwood Holdings posts 3Q profit   [Oct-25-17 07:08PM  Associated Press]
▶ Westwood Holdings Group, Inc. Settles Lawsuit   [Oct-19-17 05:00PM  GlobeNewswire]
▶ 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]
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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