Intrinsic value of Houghton Mifflin Harcourt Company - HMHC

Previous Close

$7.07

  Intrinsic Value

$1.30

stock screener

  Rating & Target

str. sell

-82%

Previous close

$7.07

 
Intrinsic value

$1.30

 
Up/down potential

-82%

 
Rating

str. sell

We calculate the intrinsic value of HMHC 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 0001), $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 0.9

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
   2
   3
   4
   5
   6
   7
   8
   9
   10
   11
   12
   13
   14
   15
   16
   17
   18
   19
   20
   21
   22
   23
   24
   25
   26
   27
   28
   29
   30
   31

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  6.50
  6.35
  6.21
  6.09
  5.98
  5.89
  5.80
  5.72
  5.65
  5.58
  5.52
  5.47
  5.42
  5.38
  5.34
  5.31
  5.28
  5.25
  5.23
  5.20
  5.18
  5.16
  5.15
  5.13
  5.12
  5.11
  5.10
  5.09
  5.08
  5.07
Revenue, $m
  1,408
  1,497
  1,590
  1,687
  1,788
  1,894
  2,003
  2,118
  2,237
  2,362
  2,493
  2,629
  2,772
  2,921
  3,077
  3,240
  3,411
  3,590
  3,778
  3,975
  4,181
  4,396
  4,623
  4,860
  5,109
  5,370
  5,643
  5,931
  6,232
  6,548
Variable operating expenses, $m
  1,551
  1,648
  1,750
  1,856
  1,966
  2,081
  2,201
  2,326
  2,457
  2,593
  2,723
  2,872
  3,028
  3,191
  3,361
  3,540
  3,727
  3,922
  4,127
  4,342
  4,567
  4,803
  5,050
  5,309
  5,581
  5,866
  6,165
  6,479
  6,808
  7,153
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
  1,551
  1,648
  1,750
  1,856
  1,966
  2,081
  2,201
  2,326
  2,457
  2,593
  2,723
  2,872
  3,028
  3,191
  3,361
  3,540
  3,727
  3,922
  4,127
  4,342
  4,567
  4,803
  5,050
  5,309
  5,581
  5,866
  6,165
  6,479
  6,808
  7,153
Operating income, $m
  -143
  -151
  -160
  -169
  -178
  -188
  -198
  -208
  -219
  -231
  -231
  -243
  -256
  -270
  -285
  -300
  -315
  -332
  -349
  -368
  -387
  -407
  -427
  -449
  -472
  -497
  -522
  -548
  -576
  -605
EBITDA, $m
  16
  17
  19
  20
  21
  22
  23
  25
  26
  27
  29
  31
  32
  34
  36
  38
  40
  42
  44
  46
  49
  51
  54
  57
  59
  62
  66
  69
  73
  76
Interest expense (income), $m
  35
  46
  53
  60
  67
  74
  82
  91
  99
  108
  117
  127
  138
  148
  159
  171
  183
  196
  209
  223
  238
  254
  270
  287
  304
  323
  342
  363
  384
  407
  430
Earnings before tax, $m
  -189
  -204
  -219
  -235
  -252
  -270
  -288
  -308
  -328
  -349
  -358
  -381
  -404
  -429
  -456
  -483
  -512
  -541
  -573
  -606
  -640
  -676
  -714
  -754
  -795
  -839
  -885
  -933
  -983
  -1,036
Tax expense, $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
Net income, $m
  -189
  -204
  -219
  -235
  -252
  -270
  -288
  -308
  -328
  -349
  -358
  -381
  -404
  -429
  -456
  -483
  -512
  -541
  -573
  -606
  -640
  -676
  -714
  -754
  -795
  -839
  -885
  -933
  -983
  -1,036

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $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 assets, $m
  2,656
  2,825
  3,001
  3,184
  3,374
  3,573
  3,780
  3,996
  4,222
  4,457
  4,703
  4,961
  5,230
  5,511
  5,806
  6,114
  6,436
  6,774
  7,128
  7,499
  7,888
  8,295
  8,722
  9,170
  9,639
  10,132
  10,648
  11,190
  11,758
  12,354
Adjusted assets (=assets-cash), $m
  2,656
  2,825
  3,001
  3,184
  3,374
  3,573
  3,780
  3,996
  4,222
  4,457
  4,703
  4,961
  5,230
  5,511
  5,806
  6,114
  6,436
  6,774
  7,128
  7,499
  7,888
  8,295
  8,722
  9,170
  9,639
  10,132
  10,648
  11,190
  11,758
  12,354
Revenue / Adjusted assets
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
  0.530
Average production assets, $m
  821
  873
  927
  984
  1,043
  1,104
  1,168
  1,235
  1,304
  1,377
  1,453
  1,533
  1,616
  1,703
  1,794
  1,889
  1,989
  2,093
  2,203
  2,317
  2,437
  2,563
  2,695
  2,833
  2,978
  3,131
  3,290
  3,458
  3,633
  3,817
Working capital, $m
  -82
  -87
  -92
  -98
  -104
  -110
  -116
  -123
  -130
  -137
  -145
  -152
  -161
  -169
  -178
  -188
  -198
  -208
  -219
  -231
  -242
  -255
  -268
  -282
  -296
  -311
  -327
  -344
  -361
  -380
Total debt, $m
  875
  992
  1,114
  1,240
  1,372
  1,509
  1,653
  1,802
  1,958
  2,121
  2,292
  2,470
  2,656
  2,851
  3,054
  3,268
  3,491
  3,725
  3,970
  4,226
  4,495
  4,777
  5,073
  5,383
  5,707
  6,048
  6,405
  6,780
  7,174
  7,586
Total liabilities, $m
  1,838
  1,955
  2,077
  2,203
  2,335
  2,472
  2,616
  2,765
  2,921
  3,084
  3,255
  3,433
  3,619
  3,814
  4,017
  4,231
  4,454
  4,688
  4,933
  5,189
  5,458
  5,740
  6,036
  6,346
  6,670
  7,011
  7,368
  7,743
  8,137
  8,549
Total equity, $m
  818
  870
  924
  981
  1,039
  1,100
  1,164
  1,231
  1,300
  1,373
  1,449
  1,528
  1,611
  1,697
  1,788
  1,883
  1,982
  2,086
  2,196
  2,310
  2,429
  2,555
  2,686
  2,824
  2,969
  3,121
  3,280
  3,446
  3,621
  3,805
Total liabilities and equity, $m
  2,656
  2,825
  3,001
  3,184
  3,374
  3,572
  3,780
  3,996
  4,221
  4,457
  4,704
  4,961
  5,230
  5,511
  5,805
  6,114
  6,436
  6,774
  7,129
  7,499
  7,887
  8,295
  8,722
  9,170
  9,639
  10,132
  10,648
  11,189
  11,758
  12,354
Debt-to-equity ratio
  1.070
  1.140
  1.200
  1.260
  1.320
  1.370
  1.420
  1.460
  1.510
  1.550
  1.580
  1.620
  1.650
  1.680
  1.710
  1.740
  1.760
  1.790
  1.810
  1.830
  1.850
  1.870
  1.890
  1.910
  1.920
  1.940
  1.950
  1.970
  1.980
  1.990
Adjusted equity ratio
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308
  0.308

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  -189
  -204
  -219
  -235
  -252
  -270
  -288
  -308
  -328
  -349
  -358
  -381
  -404
  -429
  -456
  -483
  -512
  -541
  -573
  -606
  -640
  -676
  -714
  -754
  -795
  -839
  -885
  -933
  -983
  -1,036
Depreciation, amort., depletion, $m
  159
  168
  178
  188
  199
  210
  221
  233
  246
  259
  260
  274
  289
  304
  320
  337
  355
  374
  393
  414
  435
  458
  481
  506
  532
  559
  588
  617
  649
  682
Funds from operations, $m
  -29
  -35
  -41
  -47
  -54
  -60
  -67
  -75
  -82
  -90
  -98
  -107
  -116
  -125
  -135
  -146
  -156
  -168
  -180
  -192
  -205
  -219
  -233
  -248
  -263
  -280
  -297
  -315
  -334
  -354
Change in working capital, $m
  -5
  -5
  -5
  -6
  -6
  -6
  -6
  -7
  -7
  -7
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -11
  -11
  -12
  -13
  -13
  -14
  -14
  -15
  -16
  -17
  -17
  -18
Cash from operations, $m
  -24
  -30
  -36
  -42
  -48
  -54
  -61
  -68
  -75
  -83
  -91
  -99
  -108
  -117
  -126
  -136
  -146
  -157
  -169
  -181
  -193
  -206
  -220
  -234
  -249
  -265
  -281
  -299
  -317
  -336
Maintenance CAPEX, $m
  -138
  -147
  -156
  -166
  -176
  -186
  -197
  -209
  -220
  -233
  -246
  -260
  -274
  -289
  -304
  -320
  -337
  -355
  -374
  -393
  -414
  -435
  -458
  -481
  -506
  -532
  -559
  -588
  -617
  -649
New CAPEX, $m
  -50
  -52
  -54
  -56
  -59
  -61
  -64
  -67
  -70
  -73
  -76
  -80
  -83
  -87
  -91
  -95
  -100
  -104
  -109
  -115
  -120
  -126
  -132
  -138
  -145
  -152
  -160
  -167
  -176
  -184
Cash from investing activities, $m
  -188
  -199
  -210
  -222
  -235
  -247
  -261
  -276
  -290
  -306
  -322
  -340
  -357
  -376
  -395
  -415
  -437
  -459
  -483
  -508
  -534
  -561
  -590
  -619
  -651
  -684
  -719
  -755
  -793
  -833
Free cash flow, $m
  -212
  -229
  -246
  -264
  -282
  -302
  -322
  -343
  -365
  -388
  -413
  -438
  -464
  -492
  -521
  -552
  -583
  -617
  -652
  -688
  -727
  -767
  -809
  -854
  -900
  -949
  -1,000
  -1,054
  -1,110
  -1,169
Issuance/(repayment) of debt, $m
  112
  117
  122
  127
  132
  137
  143
  150
  156
  163
  170
  178
  186
  195
  204
  213
  223
  234
  245
  257
  269
  282
  295
  310
  325
  341
  357
  375
  393
  413
Issuance/(repurchase) of shares, $m
  238
  256
  273
  292
  311
  331
  352
  374
  397
  421
  434
  460
  487
  516
  546
  578
  611
  646
  682
  720
  760
  802
  846
  892
  940
  991
  1,044
  1,100
  1,158
  1,220
Cash from financing (excl. dividends), $m  
  350
  373
  395
  419
  443
  468
  495
  524
  553
  584
  604
  638
  673
  711
  750
  791
  834
  880
  927
  977
  1,029
  1,084
  1,141
  1,202
  1,265
  1,332
  1,401
  1,475
  1,551
  1,633
Total cash flow (excl. dividends), $m
  138
  144
  149
  155
  161
  167
  174
  181
  188
  196
  191
  200
  209
  219
  229
  239
  251
  263
  275
  288
  302
  316
  332
  348
  365
  383
  401
  421
  442
  463
Retained Cash Flow (-), $m
  -238
  -256
  -273
  -292
  -311
  -331
  -352
  -374
  -397
  -421
  -434
  -460
  -487
  -516
  -546
  -578
  -611
  -646
  -682
  -720
  -760
  -802
  -846
  -892
  -940
  -991
  -1,044
  -1,100
  -1,158
  -1,220
Prev. year cash balance distribution, $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 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
  -100
  -112
  -124
  -137
  -150
  -164
  -179
  -194
  -209
  -225
  -242
  -260
  -278
  -297
  -317
  -338
  -360
  -383
  -407
  -432
  -458
  -485
  -514
  -544
  -575
  -608
  -643
  -679
  -717
  -756
Discount rate, %
  5.90
  6.20
  6.50
  6.83
  7.17
  7.53
  7.91
  8.30
  8.72
  9.15
  9.61
  10.09
  10.60
  11.13
  11.68
  12.27
  12.88
  13.52
  14.20
  14.91
  15.65
  16.44
  17.26
  18.12
  19.03
  19.98
  20.98
  22.03
  23.13
  24.29
PV of cash for distribution, $m
  -95
  -99
  -103
  -105
  -106
  -106
  -105
  -102
  -99
  -94
  -88
  -82
  -75
  -68
  -61
  -53
  -46
  -39
  -33
  -27
  -22
  -17
  -13
  -10
  -7
  -5
  -4
  -3
  -2
  -1
Current shareholders' claim on cash, %
  78.6
  61.7
  48.3
  37.8
  29.6
  23.1
  18.0
  14.1
  11.0
  8.5
  6.7
  5.2
  4.1
  3.2
  2.5
  1.9
  1.5
  1.2
  0.9
  0.7
  0.5
  0.4
  0.3
  0.3
  0.2
  0.2
  0.1
  0.1
  0.1
  0.1

Houghton Mifflin Harcourt Company (HMH) is a global learning company, specializing in education solutions across a range of media. The Company operates through two segments: Education and Trade Publishing. As of December 31, 2016, the Company delivered content, services and technology to both educational institutions and consumers, reaching over 50 million students in approximately 150 countries across the world. It sells its products and services across multiple media and distribution channels. Its Education segment provides educational content, services and technology solutions to meet the diverse needs of classrooms. Its Trade Publishing segment develops, markets and sells consumer books in print and digital formats, and licenses book rights to other publishers and electronic businesses in the United States and abroad.

FINANCIAL RATIOS  of  Houghton Mifflin Harcourt Company (HMHC)

Valuation Ratios
P/E Ratio -3.1
Price to Sales 0.6
Price to Book 1
Price to Tangible Book
Price to Cash Flow 6
Price to Free Cash Flow -10.1
Growth Rates
Sales Growth Rate -3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 23%
Cap. Spend. - 3 Yr. Gr. Rate 4.2%
Financial Strength
Quick Ratio 38
Current Ratio 0
LT Debt to Equity 86.9%
Total Debt to Equity 87.8%
Interest Coverage -9
Management Effectiveness
Return On Assets -8.8%
Ret/ On Assets - 3 Yr. Avg. -5.3%
Return On Total Capital -15.7%
Ret/ On T. Cap. - 3 Yr. Avg. -9.3%
Return On Equity -27.4%
Return On Equity - 3 Yr. Avg. -14.2%
Asset Turnover 0.5
Profitability Ratios
Gross Margin 41.5%
Gross Margin - 3 Yr. Avg. 41.1%
EBITDA Margin -1.2%
EBITDA Margin - 3 Yr. Avg. 9%
Operating Margin -22.6%
Oper. Margin - 3 Yr. Avg. -12.4%
Pre-Tax Margin -25.5%
Pre-Tax Margin - 3 Yr. Avg. -14.7%
Net Profit Margin -20.8%
Net Profit Margin - 3 Yr. Avg. -12.8%
Effective Tax Rate 18.6%
Eff/ Tax Rate - 3 Yr. Avg. 8.6%
Payout Ratio 0%

HMHC stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the HMHC stock intrinsic value calculation we used $1322 million for the last fiscal year's total revenue generated by Houghton Mifflin Harcourt Company. The default revenue input number comes from 0001 income statement of Houghton Mifflin Harcourt Company. 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 HMHC stock valuation model: a) initial revenue growth rate of 6.5% 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 5.9%, whose default value for HMHC is calculated based on our internal credit rating of Houghton Mifflin Harcourt Company, 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 Houghton Mifflin Harcourt Company.
    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 HMHC stock the variable cost ratio is equal to 110.2%.

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 HMHC 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 6% for Houghton Mifflin Harcourt Company.

Corporate tax rate of 27% is the nominal tax rate for Houghton Mifflin Harcourt Company. 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 HMHC 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 HMHC are equal to 58.3%.

Life of production assets of 5.6 years is the average useful life of capital assets used in Houghton Mifflin Harcourt Company 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 HMHC is equal to -5.8%. 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 - $768.47 million for Houghton Mifflin Harcourt Company - 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 123.666 million for Houghton Mifflin Harcourt Company 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 Houghton Mifflin Harcourt Company at the current share price and the inputted number of shares is $0.9 billion.

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