CTS' estimated fair value is US$41.05 based on 2 Stage Free Cash Flow to Equity
CTS' US$53.66 share price signals that it might be 31% overvalued
CTS' peers seem to be trading at a higher premium to fair value based onthe industry average of -33%
Does the July share price for CTS Corporation (NYSE:CTS) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
The Model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$79.2m
US$75.0m
US$72.7m
US$71.6m
US$71.4m
US$71.8m
US$72.6m
US$73.6m
US$74.9m
US$76.4m
Growth Rate Estimate Source
Analyst x2
Est @ -5.39%
Est @ -3.06%
Est @ -1.43%
Est @ -0.29%
Est @ 0.51%
Est @ 1.07%
Est @ 1.47%
Est @ 1.74%
Est @ 1.93%
Present Value ($, Millions) Discounted @ 7.5%
US$73.7
US$64.9
US$58.5
US$53.7
US$49.8
US$46.6
US$43.8
US$41.4
US$39.2
US$37.1
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$509m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 7.5%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$1.5b÷ ( 1 + 7.5%)10= US$746m
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$1.3b. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$53.7, the company appears reasonably expensive at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
NYSE:CTS Discounted Cash Flow July 18th 2024
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 CTS 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 7.5%, which is based on a levered beta of 1.108. 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 CTS
Strength
Debt is not viewed as a risk.
Balance sheet summary for CTS.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Electronic market.
Expensive based on P/E ratio and estimated fair value.
What are analysts forecasting for CTS?
Opportunity
Annual earnings are forecast to grow faster than the American market.
Threat
No apparent threats visible for CTS.
Looking Ahead:
Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. Can we work out why the company is trading at a premium to intrinsic value? For CTS, we've put together three essential elements you should look at:
Risks: For example, we've discovered 1 warning sign for CTS that you should be aware of before investing here.
Future Earnings: How does CTS'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.
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 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
现金流折现的最重要的输入是折现率和实际现金流。投资的一部分是对公司未来表现的自我评估,所以尝试进行计算并检查自己的假设。DCF还没有考虑行业可能出现的周期性或公司未来的资本需求,因此它不能完全反映公司的潜在表现。考虑到我们正在考虑成为CTS的潜在股东,因此使用的折现率是权益成本,而不是资本成本(或加权平均资本成本,WACC),其中计算负债。在本计算中,我们使用了7.5%的折现率,这是基于1.108的杠杆贝塔。贝塔是一种衡量股票波动性的指标,与整个市场相比。我们从全球可比公司的同行业平均贝塔获得我们的贝塔, imposed limit between 0.8 and 2.0,这是一个稳定业务的合理范围。