The projected fair value for FRP Holdings is US$39.90 based on 2 Stage Free Cash Flow to Equity
FRP Holdings' US$32.03 share price indicates it is trading at similar levels as its fair value estimate
FRP Holdings' peers seem to be trading at a lower discount to fair value based onthe industry average of 11%
Today we will run through one way of estimating the intrinsic value of FRP Holdings, Inc. (NASDAQ:FRPH) by taking the forecast future cash flows of the company and discounting them back to today's value. This will be done using the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$36.5m
US$38.9m
US$41.0m
US$42.9m
US$44.7m
US$46.3m
US$47.8m
US$49.3m
US$50.7m
US$52.2m
Growth Rate Estimate Source
Est @ 8.41%
Est @ 6.67%
Est @ 5.46%
Est @ 4.61%
Est @ 4.01%
Est @ 3.59%
Est @ 3.30%
Est @ 3.10%
Est @ 2.95%
Est @ 2.85%
Present Value ($, Millions) Discounted @ 8.0%
US$33.8
US$33.4
US$32.6
US$31.6
US$30.4
US$29.2
US$27.9
US$26.7
US$25.4
US$24.2
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$295m
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 (2.6%) 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%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1b÷ ( 1 + 8.0%)10= US$464m
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$759m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$32.0, the company appears about fair value at a 20% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
NasdaqGS:FRPH Discounted Cash Flow November 28th 2024
The Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at FRP Holdings 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 accounts for debt. In this calculation we've used 8.0%, which is based on a levered beta of 1.300. Beta is a measure of a stock's volatility, compared 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.
SWOT Analysis for FRP Holdings
Strength
Earnings growth over the past year exceeded the industry.
Debt is well covered by earnings.
Weakness
No major weaknesses identified for FRPH.
Opportunity
Current share price is below our estimate of fair value.
Lack of analyst coverage makes it difficult to determine FRPH's earnings prospects.
Threat
Debt is not well covered by operating cash flow.
Next Steps:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For FRP Holdings, there are three essential elements you should assess:
Risks: Every company has them, and we've spotted 2 warning signs for FRP Holdings (of which 1 shouldn't be ignored!) you should know about.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for FRPH's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
