Key Insights

The projected fair value for Progress Software is US$88.99 based on 2 Stage Free Cash Flow to Equity

Progress Software’s US$56.62 share price signals that it might be 36% undervalued

The US$63.43 analyst price target for PRGS is 29% less than our estimate of fair value
In this article we are going to estimate the intrinsic value of Progress Software Corporation (NASDAQ:PRGS) by estimating the company’s future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Before you think you won’t be able to understand it, just read on! It’s actually much less complex than you’d imagine.
We generally believe that a company’s value is the present value of all the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
See our latest analysis for Progress Software
Step By Step Through The Calculation
We use what is known as a 2stage model, which simply means we have two different periods of growth rates for the company’s cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren’t available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with reduced free cash flow will slow their rate of depreciation, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10year free cash flow (FCF) estimate
2023 
2024 
2025 
2026 
2027 
2028 
2029 
2030 
2031 
2032 

Leveraged FCF ($, Millions) 
US$179.1m 
US$205.9m 
US$229.6m 
US$254.8m 
US$280.3m 
US$299.3m 
US$315.3m 
US$329.1m 
US$341.2m 
US$352.1m 
Growth Rate Estimate Source 
Analyst x3 
Analyst x3 
Analyst x1 
Analyst x1 
Analyst x1 
Est @ 6.76% 
Est @ 5.35% 
Est @ 4.37% 
Est @ 3.68% 
Est @ 3.20% 
Present Value ($, Millions) Discounted @ 9.1% 
US$164 
US$173 
US$177 
US$180 
US$182 
US$178 
US$172 
US$164 
US$156 
US$148 
(“Est” = FCF growth rate estimated by Simply Wall St)
Present Value of 10year Cash Flow (PVCF) = US$1.7b
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country’s GDP growth. In this case we have used the 5year average of the 10year government bond yield (2.1%) to estimate future growth. In the same way as with the 10year ‘growth’ period, we discount future cash flows to today’s value, using a cost of equity of 9.1%.
Terminal Value (TV)= FCF_{2032} × (1 + g) ÷ (r – g) = US$352m× (1 + 2.1%) ÷ (9.1%– 2.1%) = US$5.1b
Present Value of Terminal Value (PVTV)= TV / (1 + r)^{10}= US$5.1b÷ ( 1 + 9.1%)^{10}= US$2.2b
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$3.9b. To get the intrinsic value per share, we divide this by the total number of outstanding shares. Relative to the current share price of US$56.6, the company appears quite undervalued at a 36% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope – move a few degrees and end up in a different galaxy. Do keep this in mind.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company’s future capital requirements, so it does not give a full picture of a company’s potential performance. Given that we are looking at Progress Software as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we’ve used 9.1%, which is based on a levered beta of 1.177. 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.
SWOT Analysis for Progress Software
strength
Weaknesses
Opportunity
Threats
Next Steps:
While important, the DCF calculation shouldn’t be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a discount to intrinsic value? For Progress Software, we’ve compiled three additional items you should assess:

risks: Take risks, for example – Progress Software has 2 warning signs we think you should be aware of.

Future Earnings: How does PRGS’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

Other High Quality Alternatives: Do you like a good allrounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock, just search here.
Have feedback on this article? Concerned about the content? get in touch with us directly. Alternatively, email editorialteam (at) simplywallst.com.
This article by Simply Wall St 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 any stock, and does not take account of your objectives or your financial situation. We aim to bring you longterm focused analysis driven by fundamental data. Note that our analysis may not factor in the latest pricesensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift Card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here