The projected fair value for Latham Group is US$4.89 based on 2 Stage Free Cash Flow to Equity
Latham Group's US$5.65 share price indicates it is trading at similar levels as its fair value estimate
Our fair value estimate is similar to Latham Group's analyst price target of US$4.88
Today we will run through one way of estimating the intrinsic value of Latham Group, Inc. (NASDAQ:SWIM) by taking the forecast future cash flows of the company and discounting them back to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Is Latham Group Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$48.0m
US$40.0m
US$35.9m
US$33.6m
US$32.4m
US$31.8m
US$31.6m
US$31.7m
US$32.1m
US$32.5m
Growth Rate Estimate Source
Analyst x1
Analyst x1
Est @ -10.17%
Est @ -6.37%
Est @ -3.71%
Est @ -1.84%
Est @ -0.54%
Est @ 0.37%
Est @ 1.01%
Est @ 1.46%
Present Value ($, Millions) Discounted @ 7.5%
US$44.6
US$34.6
US$28.9
US$25.2
US$22.5
US$20.6
US$19.0
US$17.7
US$16.7
US$15.7
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$245m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 (2.5%) 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$661m÷ ( 1 + 7.5%)10= US$319m
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$565m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$5.7, 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.
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 Latham Group 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 1.224. 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 Latham Group
Strength
Debt is well covered by cash flow.
Balance sheet summary for SWIM.
Weakness
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 for the next 3 years.
Threat
Annual earnings are forecast to grow slower than the American market.
What else are analysts forecasting for SWIM?
Moving On:
Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/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 Latham Group, we've compiled three additional factors you should further examine:
Risks: As an example, we've found 3 warning signs for Latham Group (2 are a bit unpleasant!) that you need to consider before investing here.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for SWIM'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. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock 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
Latham Group的预测公允价值为4.89美元,基于两阶段的自由现金流至权益
Latham Group的5.65美元股价表明其交易水平与公允价值估算相似
我们的公允价值估计与Latham Group的分析师目标价4.88美元相似
今天,我们将通过一种估计Latham Group, Inc. (NASDAQ:SWIM)内在价值的方法,将公司的预测未来现金流折现到今天的价值。我们的分析将采用折现现金流模型(DCF)。事实上,并不是很复杂,尽管看起来可能非常复杂。
我们应该注意的是,估值的方法有很多种,就像DCF一样,每种技术在特定的情况下都有其优点和缺点。对于那些热爱股权分析的学习者来说,这里的 Simply Wall St 分析模型可能是一些感兴趣的内容。