Fair value estimate of Shoals Technologies Group, Inc. (NASDAQ: SHLS)
How far is Shoals Technologies Group, Inc. (NASDAQ: SHLS) from its intrinsic value? Using the most recent financial data, we’ll examine whether the stock price is fair by estimating the company’s future cash flows and discounting them to their present value. One way to do this is to use the Discounted Cash Flow (DCF) model. Don’t be put off by the lingo, the math is actually pretty straightforward.
Remember, however, that there are many ways to estimate the value of a business, and a DCF is just one method. If you want to know more about discounted cash flow, the rationale for this calculation can be read in detail in the Simply Wall St.
We use the 2-step growth model, which simply means that we take into account two stages of business growth. During the initial period, the business can have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we need to estimate the next ten years of cash flow. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated 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 down more in the early years than in subsequent years.
In general, we assume that a dollar today is worth more than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today’s dollars:
10-year free cash flow (FCF) forecast
|Leverage FCF ($, Millions)||US $ 73.0 million||US $ 121.7 million||US $ 161.5 million||US $ 199.5 million||US $ 233.6 million||US $ 262.8 million||US $ 287.4 million||US $ 307.9 million||US $ 325.1 million||US $ 339.7 million|
|Source of growth rate estimate||Analyst x6||Analyst x4||East @ 32.77%||Is 23.53%||Est @ 17.06%||Est @ 12.53%||Est @ 9.36%||Est @ 7.14%||East @ 5.58%||Is 4.5%|
|Present value (in millions of dollars) discounted at 7.1%||US $ 68.2||106 USD||US $ 131||US $ 152||$ 166||$ 174||$ 178||$ 178||US $ 175||$ 171|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 1.5 billion
It is now a matter of calculating the Terminal Value, which takes into account 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 of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to their present value at a cost of equity of 7.1%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 340 million × (1 + 2.0%) ÷ (7.1% to 2.0%) = US $ 6.7 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 6.7 billion ÷ (1 + 7.1%)ten= US $ 3.4 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 4.9 billion. The last step is then to divide the equity value by the number of shares outstanding. Compared to the current share price of US $ 32.7, the company appears to be around fair value at the time of writing. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
NasdaqGM: SHLS Discounted Cash Flow November 2, 2021
The above calculation is very dependent on two assumptions. One is the discount rate and the other is cash flow. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play 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 Shoals Technologies Group 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 into account debt. . In this calculation, we used 7.1%, which is based on a leveraged beta of 1.176. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our average beta from the industry beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
While important, calculating DCF shouldn’t be the only metric you look at when looking for a business. DCF models are not the ultimate solution for investment valuation. Preferably, you would apply different cases and assumptions and see their impact on the valuation of the business. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For Shoals Technologies Group, we have compiled three fundamental aspects that you should take a closer look at:
- Risks: Concrete example, we have spotted 4 warning signs for Shoals Technologies Group you must be aware, and 2 of them are a bit rude.
- Future benefits: How does SHLS’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: 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 trading fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each NASDAQGM share. If you want to find the calculation for other actions, just search here.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative material. Simply Wall St has no position in the mentioned stocks.
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