Estimated fair value of USA Truck, Inc. (NASDAQ: USAK)
Does USA Truck, Inc.’s (NASDAQ:USAK) June stock price reflect what it’s really worth? Today we are going to estimate the intrinsic value of the stock by projecting its future cash flows and then discounting them to the present value. Our analysis will use the discounted cash flow (DCF) model. Believe it or not, it’s not too hard to follow, as you’ll see in our example!
Businesses can be valued in many ways, which is why we emphasize that a DCF is not perfect for all situations. For those who are passionate about stock analysis, the Simply Wall St analysis template here may interest you.
See our latest analysis for USA Truck
Step by step in the calculation
We will use a twostage DCF model which, as the name suggests, takes into account two stages of growth. The first stage is usually a period of higher growth which stabilizes towards the terminal value, captured in the second period of “sustained growth”. To begin with, we need to obtain cash flow estimates for the next ten years. Since no analyst estimate of free cash flow is available, we have extrapolated the previous free cash flow (FCF) from the company’s latest 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 discount the value of these future cash flows to their estimated value in today’s dollars:
10Year Free Cash Flow (FCF) Forecast
2022 
2023 
2024 
2025 
2026 
2027 
2028 
2029 
2030 
2031 

Leveraged FCF ($, millions) 
$22.9 million 
$22.3 million 
$22.1 million 
$22.1 million 
$22.2 million 
$22.4 million 
$22.7 million 
$23.0 million 
$23.3 million 
$23.7 million 
Growth rate estimate Source 
Is @ 4.08% 
Is @ 2.28% 
Is @ 1.02% 
East @ 0.14% 
Is at 0.48% 
Is at 0.91% 
Is at 1.21% 
Is at 1.43% 
Is at 1.57% 
Is at 1.68% 
Present value (in millions of dollars) discounted at 9.1% 
$21.0 
$18.8 
$17.0 
$15.6 
$14.3 
$13.3 
$12.3 
$11.4 
$10.6 
$9.9 
(“East” = FCF growth rate estimated by Simply Wall St)
10year discounted cash flow (PVCF) = $144 million
After calculating the present value of future cash flows over the initial 10year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first stage. The Gordon Growth formula is used to calculate the terminal value at a future annual growth rate equal to the 5year average 10year government bond yield of 1.9%. We discount terminal cash flows to present value at a cost of equity of 9.1%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = $24 million × (1 + 1.9%) ÷ (9.1%–1.9%) = $336 million
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $336 million ÷ (1 + 9.1%)^{ten}= $140 million
The total value, or equity value, is then the sum of the present value of future cash flows, which in this case is $284 million. To get the intrinsic value per share, we divide it by the total number of shares outstanding. Based on the current share price of $31.0, the company appears to be approximately fair value at a 7.9% discount to the current share price. Remember though that this is only a rough estimate, and like any complex formula – trash in, trash out.
The hypotheses
The above calculation is highly dependent on two assumptions. One is the discount rate and the other is the cash flows. Part of investing is coming up with your own assessment of a company’s future performance, so try the math yourself and check your own assumptions. 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 view USA Truck 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 factors in debt. In this calculation, we used 9.1%, which is based on a leveraged beta of 1.698. 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:
While important, calculating DCF shouldn’t be the only metric to consider when researching a business. It is not possible to obtain an infallible valuation with a DCF model. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company’s cost of equity or the riskfree rate can have a significant impact on the valuation. For USA Truck, we’ve rounded up three more things you need to evaluate:

Risks: Take for example the ubiquitous specter of investment risk. We have identified 1 warning sign with USA Truck, and understanding this should be part of your investment process.

Future earnings: How does USAK’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 highquality alternatives: Do you like a good allrounder? Explore our interactive list of highquality actions to get an idea of what you might be missing!
PS. The Simply Wall St app performs a daily updated cash flow assessment for each NASDAQGS 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 longterm analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from pricesensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.