Does the August stock price of Wayside Technology Group, Inc. (NASDAQ:WSTG) reflect its true value? Today, by taking expected future cash flows and discounting them to present value , to estimate the intrinsic value of the stock. The discounted cash flow (DCF) model is used for analysis. Don’t let the jargon fool you. The math behind it is actually pretty simple.
Note that there are many methods of evaluating a company, and like DCF, each method has its strengths and weaknesses in certain scenarios. Avid learners of stock analysis may find the simple Wall St analysis model here interesting.
Is Wayside Technology Group evaluated fairly?
We use a two stage growth model. This simply means taking into account his two phases of the company’s growth. In the early stage, the company may have a high growth rate, and it is usually assumed that there is a steady growth rate in the second stage. First, you need to estimate your cash flow over the next 10 years. Prior free cash flow (FCF) was extrapolated from the company’s latest reported figures as analyst estimates of free cash flow are not available. Over this period, we expect companies with shrinking free cash flow to contract at a slower rate, and those with growing free cash flow to see slower growth. This is to reflect that growth tends to slow in the early years rather than in later years.
DCF is based on the idea that a dollar in the future is worth less than a dollar today, so the sum of these future cash flows is discounted to today’s value.
10-Year Free Cash Flow (FCF) Estimate
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | |
| Leverage FCF ($, million) | $5.83 million | $6.09 million | $6.32 million | $6.52 million | $6.7 million | $6.87 million | US$7.03 million | $7.19 million | $7.34 million | $7.5 million |
| growth rate source | estimated @ 5.52% | Est @ 4.45% | Est @ 3.69% | Est @ 3.17% | estimated @ 2.8% | estimated @ 2.54% | estimated @ 2.36% | estimated @ 2.23% | Est @ 2.15% | estimated @ 2.08% |
| Present Value ($, Millions) Discount @ 6.5% | 5.5 USD | 5.4 USD | 5.2 USD | 5.1 USD | 4.9 USD | 4.7 USD | 4.5 USD | 4.3 USD | 4.2 USD | 4.0 USD |
(“Est” = FCF growth rate estimated by Simply Wall St)
10-Year Present Value of Cash Flows (PVCF) = $47 million
Now we need to calculate the terminal value that accounts for all future cash flows after this decade. A very conservative growth rate is used that cannot exceed the country’s GDP growth rate for a number of reasons. In this case, we used the 5-year average of 10-year Treasury yields (1.9%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value using a 6.5% cost of equity.
Terminal value (TV)= FCF2032 × (1 + g) ÷ (r – g) = USD 7.5 million × (1 + 1.9%) ÷ (6.5%– 1.9%) = USD 167 million
Present Value of Terminal Value (PVTV)= television / (1 + r)Ten= $167 million ÷ ( 1 + 6.5%)Ten= $89 million
The total value, or equity value, is the sum of the present value of the future cash flows, in this case $136 million. Divide this by the total number of outstanding shares to get the intrinsic value per share. Compared to the current stock price of $31.0, the company’s fair value represents a 1.3% discount to the current stock price. However, evaluation is an imprecise tool, like a telescope. Move a few degrees and you’ll end up in another galaxy. Remember this.
important premise
It should be pointed out that the most important inputs to discounted cash flows are the discount rate and, of course, the actual cash flows. Part of investing is self-evaluating the company’s future performance. So try the calculations yourself and check your assumptions. The DCF also does not give a complete picture of a company’s potential performance, as it does not take into account the cyclicality of the industry or the company’s future capital requirements. Given that we see Wayside Technology Group as a potential shareholder, the cost of capital is used as the discount rate rather than the cost of capital (or weighted average cost of capital, WACC) that accounts for the debt. For this calculation we used 6.5% based on a leverage beta of 1.079. Beta is a measure of a stock’s volatility relative to the market as a whole. Our betas are taken from industry average betas of globally comparable companies and are capped at 0.8 to 2.0. This is a reasonable range for a stable business.
Go ahead:
Valuations are just one aspect of the coin in terms of making investment papers, and ideally aren’t the only analytical factor that scrutinizes a company. The DCF model is not all about investment valuation. Rather, it should be viewed as a guide to “What assumptions need to be true for this stock to be undervalued/overvalued?” If companies grow at different rates, or if their cost of capital or risk-free rates change abruptly, their outputs can look very different. For the Wayside Technology Group, we’ve summarized three relevant factors to consider.
- risk: For example, consider the ever-present specter of investment risk. Identified one warning sign We work with Wayside Technology Group and understanding this should be part of the investment process.
- management: Are insiders increasing stakes to capitalize on market sentiment on WSTG’s future prospects? See analysis of management and the board, including insights into CEO compensation and governance factors.
- Other solid businesses: Low debt, high return on equity and a strong past performance are the cornerstones of a strong business. Explore interactive stock listings with solid business fundamentals to see if there are other companies you haven’t considered.
PS. Simply Wall St updates his DCF calculations for all US stocks daily, so if you want to know the intrinsic value of other stocks, search here.
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This article by Simply Wall St is general in nature. We provide comments based on historical data and analyst projections using only unbiased methodologies and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. We aim to deliver long-term focused analysis based on fundamental data. Please note that our analysis may not take into account the latest price sensitive company announcements or qualitative materials. Is not …
The views and opinions expressed herein are those of the authors and do not necessarily reflect those of Nasdaq, Inc.
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