Latest news with #DiscountedCashFlow
Yahoo
2 days ago
- Business
- Yahoo
Does This Valuation Of Richelieu Hardware Ltd. (TSE:RCH) Imply Investors Are Overpaying?
Key Insights The projected fair value for Richelieu Hardware is CA$26.75 based on 2 Stage Free Cash Flow to Equity Richelieu Hardware is estimated to be 31% overvalued based on current share price of CA$34.93 Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Richelieu Hardware Ltd. (TSE:RCH) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example! Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early. The Method We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (CA$, Millions) CA$85.9m CA$82.8m CA$81.3m CA$80.9m CA$81.3m CA$82.1m CA$83.3m CA$84.8m CA$86.5m CA$88.3m Growth Rate Estimate Source Analyst x1 Est @ -3.60% Est @ -1.77% Est @ -0.49% Est @ 0.40% Est @ 1.03% Est @ 1.47% Est @ 1.77% Est @ 1.99% Est @ 2.14% Present Value (CA$, Millions) Discounted @ 7.4% CA$80.0 CA$71.8 CA$65.7 CA$60.8 CA$56.9 CA$53.5 CA$50.5 CA$47.9 CA$45.5 CA$43.3 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = CA$576m The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 7.4%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = CA$88m× (1 + 2.5%) ÷ (7.4%– 2.5%) = CA$1.8b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$1.8b÷ ( 1 + 7.4%)10= CA$904m The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CA$1.5b. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$34.9, the company appears potentially overvalued at the time of writing. 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 We would point out that 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 evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 Richelieu Hardware 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 7.4%, which is based on a levered beta of 1.133. 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. See our latest analysis for Richelieu Hardware SWOT Analysis for Richelieu Hardware Strength Debt is not viewed as a risk. Dividends are covered by earnings and cash flows. Weakness Earnings declined over the past year. Dividend is low compared to the top 25% of dividend payers in the Trade Distributors market. Expensive based on P/E ratio and estimated fair value. Opportunity Annual earnings are forecast to grow for the next 2 years. Threat No apparent threats visible for RCH. Looking Ahead: Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. Can we work out why the company is trading at a premium to intrinsic value? For Richelieu Hardware, we've put together three pertinent items you should explore: Financial Health: Does RCH have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk. Future Earnings: How does RCH'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 all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX every day. If you want to find the calculation for other stocks just search here. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) 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 long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
5 days ago
- Business
- Yahoo
Calculating The Fair Value Of Computershare Limited (ASX:CPU)
Key Insights The projected fair value for Computershare is AU$36.24 based on 2 Stage Free Cash Flow to Equity With AU$40.00 share price, Computershare appears to be trading close to its estimated fair value The US$37.55 analyst price target for CPU is 3.6% more than our estimate of fair value Today we will run through one way of estimating the intrinsic value of Computershare Limited (ASX:CPU) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. This technology could replace computers: discover the 20 stocks are working to make quantum computing a reality. Step By Step Through The Calculation We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF ($, Millions) US$680.0m US$675.0m US$623.2m US$609.9m US$606.2m US$609.0m US$616.4m US$627.0m US$640.2m US$655.2m Growth Rate Estimate Source Analyst x3 Analyst x3 Analyst x1 Est @ -2.13% Est @ -0.61% Est @ 0.46% Est @ 1.21% Est @ 1.73% Est @ 2.10% Est @ 2.35% Present Value ($, Millions) Discounted @ 6.8% US$637 US$592 US$512 US$469 US$437 US$411 US$390 US$371 US$355 US$340 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$4.5b After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.8%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$655m× (1 + 2.9%) ÷ (6.8%– 2.9%) = US$18b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$18b÷ ( 1 + 6.8%)10= US$9.2b 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$14b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of AU$40.0, the company appears around fair value at the time of writing. 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 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 evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 Computershare 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 6.8%, which is based on a levered beta of 0.883. 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. View our latest analysis for Computershare SWOT Analysis for Computershare Strength Debt is well covered by earnings and cashflows. Dividends are covered by earnings and cash flows. Weakness Earnings growth over the past year underperformed the Professional Services industry. Dividend is low compared to the top 25% of dividend payers in the Professional Services market. Expensive based on P/E ratio and estimated fair value. Opportunity Annual earnings are forecast to grow for the next 4 years. Threat Annual earnings are forecast to grow slower than the Australian market. Moving On: Although the valuation of a company is important, it 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Computershare, we've put together three further aspects you should explore: Risks: To that end, you should be aware of the 1 warning sign we've spotted with Computershare . Future Earnings: How does CPU'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 Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered! PS. Simply Wall St updates its DCF calculation for every Australian 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 editorial-team (at) 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 long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
Yahoo
14-07-2025
- Business
- Yahoo
An Intrinsic Calculation For Franchise Brands plc (LON:FRAN) Suggests It's 43% Undervalued
The projected fair value for Franchise Brands is UK£2.72 based on 2 Stage Free Cash Flow to Equity Franchise Brands is estimated to be 43% undervalued based on current share price of UK£1.54 Our fair value estimate is 15% lower than Franchise Brands' analyst price target of UK£3.20 Today we will run through one way of estimating the intrinsic value of Franchise Brands plc (LON:FRAN) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. 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. AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early. We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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 shrinking free cash flow will slow their rate of shrinkage, 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. Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF (£, Millions) UK£22.5m UK£25.9m UK£26.6m UK£27.3m UK£28.1m UK£28.8m UK£29.5m UK£30.3m UK£31.1m UK£31.9m Growth Rate Estimate Source Analyst x1 Analyst x1 Est @ 2.76% Est @ 2.69% Est @ 2.65% Est @ 2.62% Est @ 2.59% Est @ 2.58% Est @ 2.57% Est @ 2.56% Present Value (£, Millions) Discounted @ 7.4% UK£21.0 UK£22.5 UK£21.5 UK£20.6 UK£19.7 UK£18.8 UK£18.0 UK£17.2 UK£16.4 UK£15.7 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = UK£191m After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 5-year average of the 10-year government bond yield (2.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 7.4%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = UK£32m× (1 + 2.5%) ÷ (7.4%– 2.5%) = UK£677m Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£677m÷ ( 1 + 7.4%)10= UK£333m The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is UK£524m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£1.5, the company appears quite good value at a 43% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent. We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual 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 Franchise Brands 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 7.4%, which is based on a levered beta of 0.941. 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. Check out our latest analysis for Franchise Brands Strength Earnings growth over the past year exceeded the industry. Debt is well covered by cash flow. Dividends are covered by earnings and cash flows. Weakness Interest payments on debt are not well covered. Dividend is low compared to the top 25% of dividend payers in the Commercial Services market. Opportunity Annual earnings are forecast to grow faster than the British market. Trading below our estimate of fair value by more than 20%. Threat Revenue is forecast to grow slower than 20% per year. Valuation is only one side of the coin in terms of building your investment thesis, and 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 need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. What is the reason for the share price sitting below the intrinsic value? For Franchise Brands, we've put together three pertinent elements you should assess: Financial Health: Does FRAN have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk. Future Earnings: How does FRAN'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 all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the AIM every day. If you want to find the calculation for other stocks just search here. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) 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 long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
06-07-2025
- Business
- Yahoo
A Look At The Fair Value Of Keysight Technologies, Inc. (NYSE:KEYS)
Using the 2 Stage Free Cash Flow to Equity, Keysight Technologies fair value estimate is US$180 Current share price of US$167 suggests Keysight Technologies is potentially trading close to its fair value Analyst price target for KEYS is US$183, which is 2.1% above our fair value estimate Today we will run through one way of estimating the intrinsic value of Keysight Technologies, Inc. (NYSE:KEYS) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. 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 would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model. AI is about to change healthcare. These 20 stocks are working on everything from early diagnostics to drug discovery. The best part - they are all under $10bn in marketcap - there is still time to get in early. We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars: 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 Levered FCF ($, Millions) US$1.18b US$1.36b US$1.47b US$1.58b US$1.67b US$1.75b US$1.82b US$1.89b US$1.96b US$2.02b Growth Rate Estimate Source Analyst x4 Analyst x3 Analyst x1 Analyst x1 Est @ 5.58% Est @ 4.79% Est @ 4.23% Est @ 3.85% Est @ 3.57% Est @ 3.38% Present Value ($, Millions) Discounted @ 7.8% US$1.1k US$1.2k US$1.2k US$1.2k US$1.1k US$1.1k US$1.1k US$1.0k US$993 US$952 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$11b We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%. Terminal Value (TV)= FCF2035 × (1 + g) ÷ (r – g) = US$2.0b× (1 + 2.9%) ÷ (7.8%– 2.9%) = US$43b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$43b÷ ( 1 + 7.8%)10= US$20b The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$31b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$167, the company appears about fair value at a 7.0% 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. 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 Keysight Technologies 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 7.8%, which is based on a levered beta of 1.130. 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. Check out our latest analysis for Keysight Technologies Strength Debt is not viewed as a risk. Weakness Earnings declined over the past year. Opportunity Annual earnings are forecast to grow for the next 3 years. Current share price is below our estimate of fair value. Threat Annual earnings are forecast to grow slower than the American market. Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Keysight Technologies, we've compiled three relevant items you should consider: Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 1 warning sign with Keysight Technologies , and understanding it should be part of your investment process. Future Earnings: How does KEYS'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 all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here. — Investing narratives with Fair Values Suncorp's Next Chapter: Insurance-Only and Ready to Grow By Robbo – Community Contributor Fair Value Estimated: A$22.83 · 0.1% Overvalued Thyssenkrupp Nucera Will Achieve Double-Digit Profits by 2030 Boosted by Hydrogen Growth By Chris1 – Community Contributor Fair Value Estimated: €14.40 · 0.3% Overvalued Tesla's Nvidia Moment – The AI & Robotics Inflection Point By BlackGoat – Community Contributor Fair Value Estimated: $359.72 · 0.1% Overvalued View more featured narratives — Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) 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 long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned. Error in retrieving data Sign in to access your portfolio Error in retrieving data Error in retrieving data Error in retrieving data Error in retrieving data
Yahoo
24-05-2025
- Business
- Yahoo
Is There An Opportunity With InMode Ltd.'s (NASDAQ:INMD) 35% Undervaluation?
Using the 2 Stage Free Cash Flow to Equity, InMode fair value estimate is US$21.85 InMode's US$14.23 share price signals that it might be 35% undervalued The US$17.25 analyst price target for INMD is 21% less than our estimate of fair value Does the May share price for InMode Ltd. (NASDAQ:INMD) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. Our analysis will employ the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine. Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model. Our free stock report includes 2 warning signs investors should be aware of before investing in InMode. Read for free now. We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years. Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate: 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 Levered FCF ($, Millions) US$109.8m US$103.2m US$99.8m US$98.4m US$98.2m US$99.0m US$100.4m US$102.3m US$104.6m US$107.1m Growth Rate Estimate Source Est @ -9.83% Est @ -6.00% Est @ -3.32% Est @ -1.44% Est @ -0.13% Est @ 0.79% Est @ 1.44% Est @ 1.89% Est @ 2.20% Est @ 2.42% Present Value ($, Millions) Discounted @ 9.2% US$101 US$86.6 US$76.6 US$69.2 US$63.3 US$58.4 US$54.2 US$50.6 US$47.4 US$44.4 ("Est" = FCF growth rate estimated by Simply Wall St)Present Value of 10-year Cash Flow (PVCF) = US$651m After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.9%. We discount the terminal cash flows to today's value at a cost of equity of 9.2%. Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$107m× (1 + 2.9%) ÷ (9.2%– 2.9%) = US$1.8b Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.8b÷ ( 1 + 9.2%)10= US$730m 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$1.4b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$14.2, the company appears quite undervalued at a 35% 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. 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 evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 InMode 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 9.2%, which is based on a levered beta of 0.970. 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. See our latest analysis for InMode Strength Currently debt free. Weakness Earnings declined over the past year. Opportunity Good value based on P/E ratio and estimated fair value. Threat Annual earnings are forecast to decline for the next 3 years. Although the valuation of a company is important, it is only one of many factors that you need to assess for 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 need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Why is the intrinsic value higher than the current share price? For InMode, we've compiled three relevant items you should further examine: Risks: Every company has them, and we've spotted 2 warning signs for InMode you should know about. Future Earnings: How does INMD'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 all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing! PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here. Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) 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 long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
