Kodiak Gas Services' estimated fair value is US$24.74 based on 2 Stage Free Cash Flow to Equity
With US$26.72 share price, Kodiak Gas Services appears to be trading close to its estimated fair value
Analyst price target for KGS is US$30.00, which is 21% above our fair value estimate
In this article we are going to estimate the intrinsic value of Kodiak Gas Services, Inc. (NYSE:KGS) by taking the expected future cash flows and discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.
The Calculation
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
Levered FCF ($, Millions)
US$160.5m
US$174.6m
US$185.3m
US$194.5m
US$202.8m
US$210.2m
US$217.1m
US$223.6m
US$229.9m
US$236.1m
Growth Rate Estimate Source
Analyst x3
Analyst x3
Est @ 6.13%
Est @ 5.00%
Est @ 4.22%
Est @ 3.67%
Est @ 3.28%
Est @ 3.01%
Est @ 2.82%
Est @ 2.69%
Present Value ($, Millions) Discounted @ 11%
US$144
US$141
US$135
US$127
US$119
US$111
US$103
US$95.4
US$88.2
US$81.4
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$1.1b
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 11%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.7b÷ ( 1 + 11%)10= US$940m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$2.1b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$26.7, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
NYSE:KGS Discounted Cash Flow May 28th 2024
Important Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Kodiak Gas Services 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 11%, which is based on a levered beta of 1.926. 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 Kodiak Gas Services
Strength
Earnings growth over the past year exceeded its 5-year average.
Dividend is in the top 25% of dividend payers in the market.
Dividend information for KGS.
Weakness
Earnings growth over the past year underperformed the Energy Services industry.
Interest payments on debt are not well covered.
Expensive based on P/E ratio and estimated fair value.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Threat
Debt is not well covered by operating cash flow.
Dividends are not covered by earnings and cashflows.
Revenue is forecast to grow slower than 20% per year.
Is KGS well equipped to handle threats?
Looking Ahead:
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. For Kodiak Gas Services, there are three pertinent factors you should assess:
Risks: We feel that you should assess the 2 warning signs for Kodiak Gas Services we've flagged before making an investment in the company.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for KGS's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE 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.
主要见解
基于两阶段自由现金流至股东权益估算, Kodiak Gas Services的估计公允价值为24.74美元。
Kodiak Gas Services的股价为26.72美元,看起来接近其估值。
分析师对KGS的目标价为30.00美元,比我们的公允价值估计高21%。
在本文中,我们将通过把预期未来现金流贴现至今天的价值来估算Kodiak Gas Services, Inc. (NYSE:KGS)的内在价值。我们使用折现现金流模型来完成这一计算。尽管可能看起来相当复杂,但实际上并没有那么多要素需要考虑。
现金流贴现最重要的输入是折现率和实际现金流。您不必同意这些输入,我建议您重新计算并对它们进行调整。DCF还没有考虑行业的可能循环特性或公司未来的资本需求,因此它不会给出一个公司潜在表现的完整图片。考虑到我们正在看Kodiak Gas Services作为潜在股东,使用权益成本作为折现率,而不是考虑债务的资本成本(或加权平均资本成本,WACC)。在这个计算中,我们使用了11%,它基于一个净资产收益率为1.926的杠杆beta。beta是一个股票相对于整个市场的波动率的衡量标准。我们从全球可比公司的行业平均beta中得到我们的beta,给定一个限制范围介于0.8到2.0之间,这是一个稳定企业的合理范围。
Kodiak Gas Services SWOT分析
优势
过去一年的盈利增长超过了其5年的平均水平
股息在市场上支付的股息的前25%。
KGS的股息信息。
弱点
过去一年的盈利增长表现不如能源服务行业。
债务利息支付能力不太好。
基于市销率和预估公允价值过高。
机会
预计年度盈利增长将快于美国市场。
威胁
运营现金流无法很好地覆盖债务。
分红派息不是由盈利和现金流量来覆盖的。
预计营业收入每年增长将慢于20%。
KGS能够有效应对威胁吗?
展望未来:
估值仅是建立投资论点的一个方面,也是您需要评估一家公司的众多因素之一。DCF模型不是完美的股票估值工具。相反,DCF模型最好的用途是测试某些假设和理论,以查看它们是否会导致公司被低估或高估。如果公司以不同的速度增长,或者如果其权益成本或无风险利率发生大的变化,输出可能会有很大的不同。对于Kodiak Gas Services,您应该评估三个相关因素:
风险:在投资Kodiak Gas Services之前,我们认为您应该评估我们曾经标记出来的2个警告信号。