Revolutionary Analysis Unlocks Accel Entertainment Value

Calculating the Intrinsic Value of Accel Entertainment, Inc. (NYSE:ACEL)

The Terminal Value

In calculating the intrinsic value of Accel Entertainment, Inc. (NYSE:ACEL), we will define the terminal value, representing the company’s cash flows beyond the initial projection period, and explain how we arrive at a conservative yet plausible growth rate.

The terminal value is calculated using the formula TV = FCF 2034 × (1 + g) ÷ (r – g), where FCF 2034 represents the company’s free cash flow in 2034, g is the growth rate, and r is the discount rate. For this calculation, we will use a very conservative growth rate that cannot exceed that of a country’s GDP growth.

We will use the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. This is a conservative approach, as it assumes that the company’s growth will slow down over time and eventually converge to the GDP growth rate.

Using this formula, we can calculate the terminal value as follows:

Terminal Value (TV) = US$78m × (1 + 2.9%) ÷ (9.2% – 2.9%) = US$1.3b

This represents the company’s cash flows beyond the initial projection period.

Discounting Cash Flows to Present Value

Now that we have calculated the terminal value, we need to discount it to present value using the appropriate discount rate reflecting Accel Entertainment’s risk profile. We will use a cost of equity of 9.2%, which is based on a levered beta of 1.444.

Beta is a measure of a stock’s volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

We will use the formula PVTV = TV / (1 + r)^10 to discount the terminal value to present value. This formula assumes that the terminal value will be received in 10 years and that the discount rate will remain constant over time.

Using this formula, we can calculate the present value of the terminal value as follows:

Present Value of Terminal Value (PVTV) = US$1.3b ÷ (1 + 9.2%)^10 = US$531m

Arriving at the Equity Value

Now that we have calculated the present value of the terminal value, we can combine it with the discounted cash flows to arrive at the total equity value.

We will use the formula Total Equity Value = FCF 2034 + PVTV to calculate the total equity value. This formula assumes that the company’s free cash flow in 2034 will be US$78m and that the present value of the terminal value is US$531m.

Using this formula, we can calculate the total equity value as follows:

Total Equity Value = US$78m + US$531m = US$960m

Calculating the Intrinsic Value per Share

Finally, we can calculate the intrinsic value per share by dividing the total equity value by the total number of shares outstanding.

We will use the formula Intrinsic Value per Share = Total Equity Value ÷ Total Number of Shares Outstanding to calculate the intrinsic value per share.

Using this formula, we can calculate the intrinsic value per share as follows:

Intrinsic Value per Share = US$960m ÷ 87.2m shares = US$11.02 per share

This represents the intrinsic value of Accel Entertainment, Inc. (NYSE:ACEL) per share.

Analyzing the Results and Comparing to the Market

Assessing Fair Value

Now that we have calculated the intrinsic value per share, we can compare it to the current share price to assess whether the stock appears overvalued, undervalued, or fairly priced.

We can use the formula Fair Value = Intrinsic Value per Share ÷ Current Share Price to calculate the fair value of the stock.

Using this formula, we can calculate the fair value as follows:

Fair Value = US$11.02 per share ÷ US$11.2 per share = 98.2%

This represents the fair value of Accel Entertainment, Inc. (NYSE:ACEL) compared to the current share price.

Based on this calculation, we can see that the stock appears to be fairly priced, with a 1.8% discount to the current share price.

Considering the Limitations of DCF

It is essential to note that the DCF model has inherent limitations, and the results should be considered in conjunction with other valuation metrics and thorough fundamental analysis.

The DCF model assumes that the company’s growth will continue indefinitely, which may not be the case in reality. Additionally, the model does not consider the possible cyclicality of an industry or a company’s future capital requirements.

As such, the intrinsic value calculated using the DCF model should be used as a starting point for further analysis rather than a definitive valuation.

Assumptions and Limitations

Discount Rate

The calculation above is very dependent on the discount rate used. A higher discount rate will result in a lower intrinsic value, while a lower discount rate will result in a higher intrinsic value.

We have used a cost of equity of 9.2% based on a levered beta of 1.444. This is a reasonable range for a stable business, but it may not accurately reflect the company’s true risk profile.

Therefore, it is essential to conduct thorough research and analysis to determine the appropriate discount rate for Accel Entertainment, Inc. (NYSE:ACEL).

Cash Flows

The calculation above is also dependent on the cash flows used. We have assumed that the company’s free cash flow in 2034 will be US$78m, which may not be the actual value.

Therefore, it is essential to conduct thorough research and analysis to determine the company’s true cash flows and to make adjustments to the calculation accordingly.