Travel + Leisure Co. (NYSE:TNL) is trading at a 49% discount? | Tech US News


Today we will look at one way to estimate the intrinsic value of Travel + Leisure Co. (NYSE:TNL) by estimating the company’s future cash flows and discounting them to their present value. We will use the discounted cash flow (DCF) model this time. Patterns like these may seem beyond a layman’s understanding, but they are fairly easy to follow.

In general, we believe that the value of a company is the present value of all the cash it will generate in the future. However, a DCF is only one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St. analysis model.

Check out our latest Travel + Leisure analysis

The Method

We are going to use a two-stage DCF model, which, as the name suggests, takes into account two stages of growth. The first stage is generally a period of higher growth that levels off towards the terminal value, captured in the second period of “steady growth”. To start, we need to get estimates of the next ten years of cash flows. Whenever possible, we use analyst estimates, but when these are not available we extrapolate previous free cash flow (FCF) from the latest estimate or reported value. We hypothesize that firms with decreasing free cash flow will slow their rate of contraction and that firms with increasing free cash flow will see their growth rate slow during this period. We do this to reflect that growth tends to slow more in early years than in later years.

We generally assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated dollar value today:

10-year free cash flow (FCF) forecast

2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Leveraged FCF ($, million) 544.3 million dollars 576.1 million dollars 600.5 million dollars 621.9 million dollars 641.1 million dollars 658.7 million dollars 675.3 million dollars 691.3 million dollars 706.8 million dollars 722.1 million dollars
Source of growth rate estimate Analyst x3 Analyst x3 Est @ 4.24% Est @ 3.56% Est @ 3.09% Est @ 2.75% Est @ 2.52% Est @ 2.36% Est @ 2.25% Est @ 2.17%
Present value ($, millions) discounted at 12% $487 $461 US $430 399 USD US $368 US $338 US $310 US $284 260 USD US $238

(“Est” = FCF growth rate estimated by Simply Wall St)
Present value of 10-year cash flow (PVCF) = $3.6 million

Now we need to calculate the terminal value, which accounts for all future cash flows after this ten-year period. For several reasons, a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case, we use the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. As with the 10-year “growth” period, we discount future cash flows to present value, using a cost of equity of 12%.

Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = $722 million × (1 + 2.0%) ÷ (12%– 2.0%) = $7.5 million

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= USD 7.5 billion ÷ ( 1 + 12 %)10= $2.5 million

The total value is the sum of the cash flows over the next ten years plus the discounted terminal value, resulting in the Total Equity Value, which in this case is $6.1 million. In the last step we divide the equity value by the number of outstanding shares. Compared to the current share price of US$38.0, the company looks quite undervalued at a 49% discount to where the share price is currently trading. Assumptions in any calculation have a big impact on the valuation, so it’s best to see this as a rough estimate, not accurate down to the last penny.

NYSE: TNL Discounted Cash Flow as of November 18, 2022

Important assumptions

Now, the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. DCF also does not consider the potential cyclicality of an industry, or a company’s future capital requirements, so it does not give a complete picture of a company’s potential performance. Since we are looking at Travel + Leisure as potential shareholders, the cost of capital is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) that accounts for debt. In this calculation we use 12%, which is based on a leveraged beta of 1.905. Beta is a measure of a stock’s volatility, compared to the market as a whole. We derive our beta from the average beta of the industry of comparable companies worldwide, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.


While a company’s valuation is important, it shouldn’t be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be undervalued or overvalued?” For example, changes in the company’s cost of equity capital or the risk-free rate can significantly affect the valuation. Why is the intrinsic value higher than the current stock price? For Travel + Leisure, we’ve put together three additional items to consider:

  1. risks: Note that Travel + Leisure is showing 2 warning signs in our investment analysis and 1 of them is potentially serious…
  2. Future earnings: How does TNL’s growth rate compare to its peers and the broader market? Dig deeper into the analyst consensus number for the next few years by interacting with our free analyst growth expectations chart.
  3. Other Solid Businesses: Low debt, high returns on equity and good past performance are key to a strong business. Why not explore our interactive list of stocks with strong business fundamentals to see if there are other companies you might not have considered!

PS The Simply Wall St app performs a discounted cash flow valuation for every NYSE stock every day. If you want to find the calculation for other stocks just search here.

Valuation is complex, but we’re helping to make it simple.

Find out if Travel + Leisure is potentially overvalued or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and caveats, dividends, insider trading and financial health.

Check out the free analysis

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares, nor does it take into account your goals or financial situation. We aim to provide you with long-term focused analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company listings or qualitative material. Simply Wall St has no position in any of the stocks mentioned.


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