Calculating The Fair Value Of Nathan's Famous, Inc. (NASDAQ:NATH)

In This Article:

Key Insights

  • Nathan's Famous' estimated fair value is US$83.53 based on 2 Stage Free Cash Flow to Equity

  • Nathan's Famous' US$73.84 share price indicates it is trading at similar levels as its fair value estimate

Does the July share price for Nathan's Famous, Inc. (NASDAQ:NATH) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Nathan's Famous

The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

Levered FCF ($, Millions)

US$19.6m

US$19.9m

US$20.2m

US$20.6m

US$21.0m

US$21.5m

US$21.9m

US$22.4m

US$22.9m

US$23.5m

Growth Rate Estimate Source

Est @ 0.91%

Est @ 1.35%

Est @ 1.66%

Est @ 1.87%

Est @ 2.03%

Est @ 2.13%

Est @ 2.21%

Est @ 2.26%

Est @ 2.30%

Est @ 2.32%

Present Value ($, Millions) Discounted @ 8.0%

US$18.2

US$17.1

US$16.1

US$15.1

US$14.3

US$13.5

US$12.8

US$12.1

US$11.5

US$10.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$142m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. 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 have used the 5-year average of the 10-year government bond yield (2.4%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.0%.

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