FMD = Super Value Stock

I ran a dividend discount model on FMD today and its shocking how undervalued this stock is on that valuation basis, and FMD doesn’t even pay a large dividend. Here were the assumptions that I used:

Growth rate = 20% for 5 years (this is much lower than their historical growth rate and in line with the 20%+ industry rate)

Growth rate at maturity = 8% (tuition increases + enrollment gains will probably always grow faster than GDP)

Transition years to growth rate at maturity = 15 (basically assumes about a 1% decline in growth per year)

Risk Premium = 7% (means that investors will demand a 7% return over the risk-free rate in order to compensate them for owning the equity)

Payout during growth years = 13% (current payout rate)

Payout at maturity = 45% (slower growth means a higher payout rate)

The theoretical price was $115 per share or 210% higher than the current $37 share price. I actually made these numbers more conservative than what Bloomberg suggested. Go ahead, find a Bloomberg terminal and plug these numbers in to see for yourself!