Is There An Opportunity With InterContinental Hotels Group PLC's (LON:IHG) 20% Undervaluation?

About where we're heading in our Principles of Finance course (BUAD 5127), this article came across my newsfeed this morning, and it hit the mark, I believe, for a topic on this forum.

The authors of this article (not attributed, published by Simply Wall St.) have used IHG as a short case study into InterContinental Hotels Group PLC's stock valuation, using methods we've been learning to this point. They estimate the stock's intrinsic value by projecting its future cash flows and then discounting them to today's value (Is There An Opportunity With InterContinental Hotels Group PLC's (LON:IHG) 20% Undervaluation? (2021, November 27)).

They used a two-stage growth method, with assumptions of both a higher growth rate and a stable growth rate. The finding of this article is timely since we just projected Ferrari N.V.'s future cash flows (2015-2019). Having now been introduced to adjusting the growth rate for different scenarios and outcomes, we can adapt our FCF analysis if there are indications of changes in their growth rate.

In their analysis, the authors estimate out ten years of IHG's cash flows to 2031. When projecting, they mention using analyst estimates, but when not available, they used historical data to extrapolate data (e.g., growth rates, ratios, YoY, etc.). Where the growth rate is shrinking, they assume that the company will slow the pace of their shrinkage, and where it's growing, they imply that the growth rate will slow over their estimated period.

They then used the Discounted Cash Flow model to draw back the present value of IHG's future cash flows. When they reached the equity value, they divided it by the number of outstanding shares, resulting in their findings.

Spoiler alert: Just as the headline baited us to believe, yes, the authors of this article believe IHG is currently undervalued, at a 20% discount. In British pounds, IHG (at the time of this article's publishing) was trading at GBP45.80 (USD61.10), and their analysis concluded the fair value at GBP57.51 (USD76.72). Seeing as how IHG suffered incredible losses last year, as many in the hospitality industry experienced in 2020, it wouldn't surprise me at all if this article was the result of a well-strategized PR team, hoping holiday spending will inspire trading activity and more travel in 2022.

InterContinental Hotels Group executive offices operate out of Denham, Buckinghamshire, England. IHG owns and operates four distinct property types, with over sixteen brands within their umbrella, in over six thousand locations globally. Today, IHG opened the market at 63.48, with a market cap of 11.46B, with 187,717,720 outstanding shares (at the time of their 2020 20-F Report filing) (InterContinental Hotels Group PLC, 2021).

https://www.ihg.com/content/us/en/about/brands

References

https://news.yahoo.com/opportunity-intercontinental-hotels-group-plcs-072303558.html

InterContinental Hotels Group PLC. (2021, March 4). Form 20-F. Retrieved from http://www.sec.gov

Is There An Opportunity With InterContinental Hotels Group PLC's (LON:IHG) 20% Undervaluation? (2021, November 27). News.yahoo.com. Retrieved November 27, 2021, from https://news.yahoo.com/opportunity-intercontinental-hotels-group-plcs-072303558.html