Intrinsic value of Pegasystems Inc. - PEGA

Previous Close

$63.74

  Intrinsic Value

$10.79

stock screener

  Rating & Target

str. sell

-83%

Previous close

$63.74

 
Intrinsic value

$10.79

 
Up/down potential

-83%

 
Rating

str. sell

We calculate the intrinsic value of PEGA 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 5.0

 

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, %
  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
  910
  931
  955
  982
  1,011
  1,044
  1,080
  1,118
  1,159
  1,204
  1,252
  1,302
  1,356
  1,414
  1,475
  1,540
  1,608
  1,680
  1,757
  1,837
  1,923
  2,012
  2,107
  2,207
  2,312
  2,423
  2,539
  2,662
  2,790
  2,926
Variable operating expenses, $m
  814
  833
  854
  878
  904
  933
  965
  999
  1,036
  1,075
  1,110
  1,155
  1,203
  1,254
  1,308
  1,365
  1,426
  1,490
  1,558
  1,629
  1,705
  1,785
  1,869
  1,957
  2,050
  2,148
  2,252
  2,360
  2,475
  2,595
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
  814
  833
  854
  878
  904
  933
  965
  999
  1,036
  1,075
  1,110
  1,155
  1,203
  1,254
  1,308
  1,365
  1,426
  1,490
  1,558
  1,629
  1,705
  1,785
  1,869
  1,957
  2,050
  2,148
  2,252
  2,360
  2,475
  2,595
Operating income, $m
  96
  98
  101
  104
  107
  111
  115
  119
  124
  129
  142
  147
  154
  160
  167
  174
  182
  190
  199
  208
  218
  228
  238
  250
  262
  274
  287
  301
  316
  331
EBITDA, $m
  110
  113
  116
  119
  123
  127
  131
  136
  141
  146
  152
  158
  165
  172
  179
  187
  195
  204
  213
  223
  233
  244
  256
  268
  281
  294
  308
  323
  339
  355
Interest expense (income), $m
  0
  0
  0
  1
  1
  2
  3
  3
  4
  5
  6
  7
  8
  9
  10
  11
  13
  14
  16
  17
  19
  21
  22
  24
  26
  29
  31
  33
  36
  39
  41
Earnings before tax, $m
  96
  98
  100
  102
  105
  108
  112
  115
  119
  123
  135
  140
  145
  150
  156
  162
  168
  175
  182
  189
  197
  205
  214
  223
  233
  243
  254
  265
  277
  290
Tax expense, $m
  26
  26
  27
  28
  28
  29
  30
  31
  32
  33
  36
  38
  39
  40
  42
  44
  45
  47
  49
  51
  53
  55
  58
  60
  63
  66
  69
  72
  75
  78
Net income, $m
  70
  71
  73
  75
  77
  79
  81
  84
  87
  90
  98
  102
  106
  109
  114
  118
  123
  127
  133
  138
  144
  150
  156
  163
  170
  178
  185
  194
  202
  212

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
  1,002
  1,025
  1,051
  1,081
  1,114
  1,150
  1,189
  1,231
  1,277
  1,326
  1,378
  1,434
  1,494
  1,557
  1,624
  1,696
  1,771
  1,851
  1,935
  2,024
  2,117
  2,216
  2,321
  2,431
  2,546
  2,668
  2,796
  2,931
  3,073
  3,222
Adjusted assets (=assets-cash), $m
  1,002
  1,025
  1,051
  1,081
  1,114
  1,150
  1,189
  1,231
  1,277
  1,326
  1,378
  1,434
  1,494
  1,557
  1,624
  1,696
  1,771
  1,851
  1,935
  2,024
  2,117
  2,216
  2,321
  2,431
  2,546
  2,668
  2,796
  2,931
  3,073
  3,222
Revenue / Adjusted assets
  0.908
  0.908
  0.909
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.909
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
  0.908
Average production assets, $m
  37
  38
  39
  40
  41
  43
  44
  46
  48
  49
  51
  53
  56
  58
  60
  63
  66
  69
  72
  75
  79
  83
  86
  90
  95
  99
  104
  109
  114
  120
Working capital, $m
  73
  74
  76
  79
  81
  84
  86
  89
  93
  96
  100
  104
  109
  113
  118
  123
  129
  134
  141
  147
  154
  161
  169
  177
  185
  194
  203
  213
  223
  234
Total debt, $m
  7
  15
  25
  36
  48
  61
  75
  91
  108
  126
  145
  165
  187
  210
  235
  261
  289
  318
  349
  382
  416
  452
  491
  531
  573
  618
  665
  715
  767
  822
Total liabilities, $m
  368
  376
  386
  397
  409
  422
  436
  452
  469
  487
  506
  526
  548
  571
  596
  622
  650
  679
  710
  743
  777
  813
  852
  892
  934
  979
  1,026
  1,076
  1,128
  1,183
Total equity, $m
  634
  649
  666
  684
  705
  728
  753
  779
  808
  839
  873
  908
  946
  986
  1,028
  1,073
  1,121
  1,171
  1,225
  1,281
  1,340
  1,403
  1,469
  1,539
  1,612
  1,689
  1,770
  1,855
  1,945
  2,040
Total liabilities and equity, $m
  1,002
  1,025
  1,052
  1,081
  1,114
  1,150
  1,189
  1,231
  1,277
  1,326
  1,379
  1,434
  1,494
  1,557
  1,624
  1,695
  1,771
  1,850
  1,935
  2,024
  2,117
  2,216
  2,321
  2,431
  2,546
  2,668
  2,796
  2,931
  3,073
  3,223
Debt-to-equity ratio
  0.010
  0.020
  0.040
  0.050
  0.070
  0.080
  0.100
  0.120
  0.130
  0.150
  0.170
  0.180
  0.200
  0.210
  0.230
  0.240
  0.260
  0.270
  0.280
  0.300
  0.310
  0.320
  0.330
  0.350
  0.360
  0.370
  0.380
  0.390
  0.390
  0.400
Adjusted equity ratio
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633
  0.633

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  70
  71
  73
  75
  77
  79
  81
  84
  87
  90
  98
  102
  106
  109
  114
  118
  123
  127
  133
  138
  144
  150
  156
  163
  170
  178
  185
  194
  202
  212
Depreciation, amort., depletion, $m
  15
  15
  15
  15
  16
  16
  16
  16
  17
  17
  10
  11
  11
  12
  12
  13
  13
  14
  14
  15
  16
  17
  17
  18
  19
  20
  21
  22
  23
  24
Funds from operations, $m
  85
  86
  88
  90
  92
  95
  98
  101
  104
  107
  109
  113
  117
  121
  126
  131
  136
  141
  147
  153
  160
  166
  174
  181
  189
  197
  206
  216
  225
  236
Change in working capital, $m
  1
  2
  2
  2
  2
  3
  3
  3
  3
  4
  4
  4
  4
  5
  5
  5
  5
  6
  6
  6
  7
  7
  8
  8
  8
  9
  9
  10
  10
  11
Cash from operations, $m
  83
  85
  86
  88
  90
  92
  95
  97
  100
  104
  105
  109
  112
  116
  121
  125
  130
  135
  141
  147
  153
  159
  166
  173
  181
  189
  197
  206
  215
  225
Maintenance CAPEX, $m
  -7
  -7
  -8
  -8
  -8
  -8
  -9
  -9
  -9
  -10
  -10
  -10
  -11
  -11
  -12
  -12
  -13
  -13
  -14
  -14
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -23
New CAPEX, $m
  -1
  -1
  -1
  -1
  -1
  -1
  -1
  -2
  -2
  -2
  -2
  -2
  -2
  -2
  -3
  -3
  -3
  -3
  -3
  -3
  -3
  -4
  -4
  -4
  -4
  -5
  -5
  -5
  -5
  -6
Cash from investing activities, $m
  -8
  -8
  -9
  -9
  -9
  -9
  -10
  -11
  -11
  -12
  -12
  -12
  -13
  -13
  -15
  -15
  -16
  -16
  -17
  -17
  -18
  -20
  -21
  -21
  -22
  -24
  -25
  -26
  -27
  -29
Free cash flow, $m
  75
  76
  78
  79
  81
  83
  85
  87
  90
  92
  93
  96
  99
  103
  107
  111
  115
  119
  124
  129
  134
  140
  146
  152
  158
  165
  172
  180
  188
  196
Issuance/(repayment) of debt, $m
  7
  8
  10
  11
  12
  13
  14
  16
  17
  18
  19
  21
  22
  23
  25
  26
  28
  29
  31
  33
  34
  36
  38
  40
  42
  45
  47
  50
  52
  55
Issuance/(repurchase) of shares, $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 from financing (excl. dividends), $m  
  7
  8
  10
  11
  12
  13
  14
  16
  17
  18
  19
  21
  22
  23
  25
  26
  28
  29
  31
  33
  34
  36
  38
  40
  42
  45
  47
  50
  52
  55
Total cash flow (excl. dividends), $m
  82
  85
  87
  90
  93
  96
  99
  103
  106
  110
  112
  117
  121
  126
  131
  137
  142
  149
  155
  162
  169
  176
  184
  192
  201
  210
  219
  229
  240
  251
Retained Cash Flow (-), $m
  -13
  -15
  -17
  -19
  -21
  -23
  -25
  -27
  -29
  -31
  -33
  -35
  -38
  -40
  -43
  -45
  -48
  -50
  -53
  -56
  -59
  -63
  -66
  -70
  -73
  -77
  -81
  -85
  -90
  -95
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
  69
  70
  71
  71
  72
  73
  74
  76
  77
  79
  79
  81
  84
  86
  89
  92
  95
  98
  102
  105
  109
  113
  118
  123
  127
  133
  138
  144
  150
  157
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
  66
  64
  61
  59
  56
  53
  50
  47
  44
  41
  38
  35
  32
  29
  26
  23
  21
  18
  16
  13
  11
  9
  8
  6
  5
  4
  3
  2
  2
  1
Current shareholders' claim on cash, %
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
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Pegasystems Inc. develops, markets, licenses and supports software applications for marketing, sales and onboarding, and customer service needs. The Company also offers software applications built on the Pega platform. Its software is designed to assist clients in building, deploying and evolving enterprise applications. Its applications and platform intersect with and encompass several traditional software markets, including Customer Relationship Management (CRM); Business Process Management (BPM); Business Rules Management Systems (BRMS); Dynamic Case Management (DCM); Decision Management, which includes Predictive and Adaptive analytics, and the Vertical Specific Software (VSS) market of industry solutions and packaged applications. It provides implementation, consulting, training, technical support and hosting services to facilitate the use of its software. The Company offers its services to financial, healthcare, insurance, manufacturing, life sciences and other markets.

FINANCIAL RATIOS  of  Pegasystems Inc. (PEGA)

Valuation Ratios
P/E Ratio 180.8
Price to Sales 6.5
Price to Book 14.5
Price to Tangible Book
Price to Cash Flow 122
Price to Free Cash Flow 232.5
Growth Rates
Sales Growth Rate 9.8%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 72.7%
Cap. Spend. - 3 Yr. Gr. Rate 25.9%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 0%
Total Debt to Equity 0%
Interest Coverage 0
Management Effectiveness
Return On Assets 4.2%
Ret/ On Assets - 3 Yr. Avg. 5.3%
Return On Total Capital 8.2%
Ret/ On T. Cap. - 3 Yr. Avg. 10.5%
Return On Equity 8.2%
Return On Equity - 3 Yr. Avg. 10.5%
Asset Turnover 1.2
Profitability Ratios
Gross Margin 68.1%
Gross Margin - 3 Yr. Avg. 68.5%
EBITDA Margin 7.9%
EBITDA Margin - 3 Yr. Avg. 10.7%
Operating Margin 4.9%
Oper. Margin - 3 Yr. Avg. 7.8%
Pre-Tax Margin 4.7%
Pre-Tax Margin - 3 Yr. Avg. 7.2%
Net Profit Margin 3.6%
Net Profit Margin - 3 Yr. Avg. 4.8%
Effective Tax Rate 22.9%
Eff/ Tax Rate - 3 Yr. Avg. 31.7%
Payout Ratio 33.3%

PEGA stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the PEGA stock intrinsic value calculation we used $892 million for the last fiscal year's total revenue generated by Pegasystems Inc.. The default revenue input number comes from 0001 income statement of Pegasystems Inc.. 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 PEGA 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 PEGA is calculated based on our internal credit rating of Pegasystems Inc., 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 Pegasystems Inc..
    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 PEGA stock the variable cost ratio is equal to 89.5%.

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 PEGA 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 5.4% for Pegasystems Inc..

Corporate tax rate of 27% is the nominal tax rate for Pegasystems Inc.. 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 PEGA 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 PEGA are equal to 4.1%.

Life of production assets of 2.9 years is the average useful life of capital assets used in Pegasystems Inc. 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 PEGA is equal to 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 - $621.531 million for Pegasystems Inc. - 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 78.467 million for Pegasystems Inc. 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 Pegasystems Inc. at the current share price and the inputted number of shares is $5.0 billion.

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