The projected fair value for Standard Motor Products is US$35.87 based on 2 Stage Free Cash Flow to Equity
With US$34.19 share price, Standard Motor Products appears to be trading close to its estimated fair value
Industry average discount to fair value of 28% suggests Standard Motor Products' peers are currently trading at a higher discount
In this article we are going to estimate the intrinsic value of Standard Motor Products, Inc. (NYSE:SMP) by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
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. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, 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$56.6m
US$52.6m
US$50.4m
US$49.3m
US$48.9m
US$49.0m
US$49.4m
US$50.1m
US$51.0m
US$52.0m
Growth Rate Estimate Source
Est @ -11.18%
Est @ -7.07%
Est @ -4.20%
Est @ -2.19%
Est @ -0.78%
Est @ 0.20%
Est @ 0.89%
Est @ 1.37%
Est @ 1.71%
Est @ 1.95%
Present Value ($, Millions) Discounted @ 8.1%
US$52.4
US$45.0
US$39.9
US$36.1
US$33.1
US$30.7
US$28.7
US$26.9
US$25.3
US$23.9
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$342m
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 8.1%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$952m÷ ( 1 + 8.1%)10= US$437m
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$779m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$34.2, the company appears about fair value at a 4.7% discount to where the stock price trades currently. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Standard Motor Products 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 8.1%, which is based on a levered beta of 1.358. 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 Standard Motor Products
Strength
Debt is not viewed as a risk.
Dividends are covered by earnings and cash flows.
Dividend information for SMP.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Auto Components market.
What are analysts forecasting for SMP?
Opportunity
Current share price is below our estimate of fair value.
Threat
No apparent threats visible for SMP.
Next Steps:
Although the valuation of a company is important, it ideally won't be the sole piece of analysis you scrutinize for a company. The DCF model is not a perfect stock valuation tool. 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. For Standard Motor Products, we've compiled three essential aspects you should further research:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Standard Motor Products (at least 1 which is a bit unpleasant) , and understanding these should be part of your investment process.
Future Earnings: How does SMP'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.
主要見解
基於2階段自由現金流股東權益法,Standard Motor Products的預期公允價值爲35.87美元。
以34.19美元的股價,Standard Motor Products似乎接近其估計的公允價值。
行業平均折價28%,表明Standard Motor Products的同行目前以更高折扣交易。
在本文中,我們將通過估算Standard Motor Products, Inc.(紐約證券交易所:SMP)的未來現金流,並將其貼現到現值來估計其內在價值。一種實現這一目標的方法是採用貼現現金流(DCF)模型。相信或不相信,根據我們的示例,你會看到它並不難。
我們普遍認爲一家公司的價值是其未來所產生的現金的現值總和。然而,DCF僅是衆多估值指標之一,並且並不是不帶缺陷。如果您想了解更多關於折現現金流的信息,可以在 Simply Wall St 分析模型中詳細閱讀其背後的理論。
儘管公司的估值很重要,但它不應該是你對一個公司進行分析時唯一關注的內容。DCF模型不是一個完美的股票估值工具,而應該被視爲指導你對這隻股票是否被低估或高估的「假設需要成立」的指南。例如,公司的權益成本或無風險利率的變化都可能對估值產生重大影響。對於Standard Motor Products,我們已經整理了三個你應該進一步研究的重要方面:
風險:比如考慮到投資風險始終存在的威脅。我們發現了Standard Motor Products的兩個警示信號(其中至少有一個有點不愉快),了解這些信號應該成爲你的投資過程的一部分。