Is PowerFleet, Inc. (NASDAQ: PWFL) trading at 33% off?
In this article, we’ll estimate the intrinsic value of PowerFleet, Inc. (NASDAQ: PWFL) by projecting its future cash flows and then discounting them to present value. We will use the Discounted Cash Flow (DCF) model on this occasion. Believe it or not, it’s not too hard to follow, as you will see in our example!
Remember, however, that there are many ways to estimate the value of a business and that a DCF is just one method. Anyone interested in learning a little more about intrinsic value should have a read of the Simply Wall St.
The model
We use what is called a 2-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually the first stage is higher growth and the second stage is lower growth stage. To begin with, we need to get cash flow estimates for the next ten years. Since no analysts estimate of free cash flow is available to us, we have extrapolated past free cash flow (FCF) from the last reported value of the company. We assume that companies with decreasing free cash flow will slow their withdrawal rate, and companies with increasing free cash flow will see their growth rate slow down during this period. We do this to reflect that growth tends to slow down more in the early years than in the later years.
Typically, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year Free Cash Flow (FCF) forecast
2021 | 2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | |
Levered FCF ($, million) | 10.4 million USD | USD 14.5 million | 18.5 million USD | $ 22.3 million | $ 25.6 million | 28.4 million USD | $ 30.7 million | $ 32.7 million | 34.4 million USD | USD 35.8 million |
Source of estimated growth rate | East @ 55.02% | Is 39.12% | Is 28% | Is 20.21% | Is at 14.76% | Is 10.94% | Is 8.27% | Is 6.4% | Is 5.09% | Is 4.18% |
Present value ($, millions) discounted at 8.5% | $ 9.6 | $ 12.3 | $ 14.5 | US $ 16.1 | $ 17.0 | $ 17.4 | $ 17.4 | $ 17.0 | US $ 16.5 | US $ 15.8 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flow (PVCF) = 153 million USD
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. 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 used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similar to the 10 year “growth” period, we discount future cash flows to present value, using a cost of equity of 8.5%.
Terminal value (TV)= FCF_{2030} × (1 + g) ÷ (r – g) = $ 36 million × (1 + 2.0%) ÷ (8.5% – 2.0%) = $ 566 million
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= $ 566 million ÷ (1 + 8.5%)^{ten}= 250 million USD
The total value is the sum of the cash flows for the next ten years plus the present terminal value, which gives the total value of equity, which in this case is US $ 403 million. The last step is then to divide the equity value by the number of shares outstanding. From the current share price of US $ 7.6, the company appears to be quite undervalued with a 33% discount from the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
NasdaqGM: PWFL Discounted Cash Flow May 3, 2021
The hypotheses
We draw your attention to the fact that the most important data for a discounted cash flow is the discount rate and, of course, the actual cash flow. If you don’t agree with these results, try the calculation yourself and play with the 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 PowerFleet 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 8.5%, which is based on a leveraged beta of 1.235. Beta is a measure of the volatility of a stock, relative 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.
Looking forward:
Valuation is only one side of the coin in terms of building your investment thesis, and ideally it won’t be the only analysis you look at for a business. The DCF model is not a perfect inventory valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. Can we understand why the company trades at a discount to its intrinsic value? For PowerFleet, we’ve put together three relevant things that you should take a closer look at:
- Risks: Take risks, for example – PowerFleet has 1 warning sign we think you should be aware of this.
- Future income: How does PWFL’s growth rate compare to its peers and to the market in general? Dig deeper into the analyst consensus count for years to come 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 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. It does not constitute a recommendation to buy or sell any stock, and does not take into account your goals or your financial situation. We aim 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 information. Simply Wall St has no position in any of the stocks mentioned.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.