A look at the intrinsic value of Atlas Technical Consultants, Inc. (NASDAQ: ATCX)
Today, we’re going to walk through one way to estimate the intrinsic value of Atlas Technical Consultants, Inc. (NASDAQ: ATCX) by estimating the company’s future cash flows and discounting them to their present value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don’t be put off by the jargon, the underlying calculations are actually quite simple.
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. Anyone interested in learning a little more about intrinsic value should read the Simply Wall St.
Check out our latest analysis for Atlas Technical Consultants
What is the estimated valuation?
We use what is called a 2-stage model, which simply means that we have two different periods of company cash flow growth rates. Generally, the first stage is a higher growth phase and the second stage is a lower growth phase. To begin with, we need to obtain cash flow estimates for the next ten years. Wherever possible, we use analysts’ estimates, but where these are not available, we extrapolate the previous free cash flow (FCF) from the latest estimate or reported value. We assume that companies with decreasing free cash flow will slow their rate of contraction and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow more in early years than in later years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we need to discount the sum of these future cash flows to arrive at an estimate of present value:
10-Year Free Cash Flow (FCF) Forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leveraged FCF ($, millions) | $27.3 million | $39.2 million | $34.7 million | $32.2 million | $30.8 million | $30.0 million | $29.6 million | $29.5 million | $29.7 million | $29.9 million |
Growth rate estimate Source | Analyst x2 | Analyst x3 | Analyst x1 | East @ -7.2% | Is @ -4.46% | Is @ -2.55% | Is @ -1.21% | East @ -0.27% | Is at 0.39% | Is 0.85% |
Present value (millions of dollars) discounted at 7.8% | $25.3 | $33.7 | $27.7 | $23.9 | $21.2 | $19.1 | $17.6 | $16.2 | $15.1 | $14.2 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year discounted cash flow (PVCF) = $214 million
We now need to calculate the terminal value, which represents all future cash flows after this ten-year period. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5-year average 10-year government bond yield of 1.9%. We discount the terminal cash flows to their present value at a cost of equity of 7.8%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = $30 million × (1 + 1.9%) ÷ (7.8%–1.9%) = $522 million
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $522m ÷ (1 + 7.8%)^{ten}= $247 million
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total equity value, which in this case is $461 million. In the last step, we divide the equity value by the number of shares outstanding. Compared to the current share price of $10.2, the company appears to be about fair value at a 15% discount to the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in a different galaxy. Keep that 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. You don’t have to agree with these entries, I recommend you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a complete picture of a company’s potential performance. Since we consider Atlas Technical Consultants 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 takes debt into account. In this calculation, we used 7.8%, which is based on a leveraged beta of 1.377. Beta is a measure of a stock’s volatility relative to the market as a whole. We derive our beta from the average industry beta of broadly comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Next steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won’t be the only piece of analysis you look at for a company. It is not possible to obtain an infallible valuation with a DCF model. Rather, it should be seen as a guide to “what assumptions must 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 have a significant impact on the valuation. For Atlas Technical Consultants, there are three important things you need to consider:
- Risks: For example, we spotted 3 Warning Signs for Atlas Technical Consultants you should be aware, and one of them doesn’t sit well with us.
- Future earnings: How does ATCX’s growth rate compare to its peers and the market in general? Dive deeper into the analyst consensus figure for the coming years by interacting with our free analyst growth forecast chart.
- Other strong companies: Low debt, high returns on equity and good past performance are essential to a strong business. Why not explore our interactive list of stocks with strong trading fundamentals to see if there are any other companies you may not have considered!
PS. The Simply Wall St app performs a daily updated cash flow assessment for each NASDAQGM stock. If you want to find the calculation for other stocks, search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.