In This Article:
I am going to run you through how I calculated the intrinsic value of Nick Scali Limited (ASX:NCK) using the discounted cash flow (DCF) method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this after February 2018 then I highly recommend you check out the latest calculation for Nickli here.
Is NCK fairly valued?
I’ve used the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I use the analyst consensus forecast of NCK’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.55%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of A$188.1M. Keen to know how I arrived at this number? Take a look at our detailed analysis here.
The graph above shows how NCK’s earnings are expected to move in the future, which should give you an idea of NCK’s outlook. Then, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. Discounting the terminal value back five years gives us a present value of A$854.7M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is A$1,042.8M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of A$12.87, which, compared to the current share price of A$7.01, we find that Nickli is quite good value at a 45.55% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For NCK, I’ve compiled three relevant factors you should further examine:
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1. Financial Health: Does NCK have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
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2. Future Earnings: How does NCK’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
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2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of NCK? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!