Using the 2 Stage Free Cash Flow to Equity, Petco Health and Wellness Company fair value estimate is US$4.58
Current share price of US$3.50 suggests Petco Health and Wellness Company is potentially 24% undervalued
The US$3.21 analyst price target for WOOF is 30% less than our estimate of fair value
How far off is Petco Health and Wellness Company, Inc. (NASDAQ:WOOF) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Is Petco Health and Wellness Company Fairly Valued?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$63.8m
US$13.3m
US$19.5m
US$127.0m
US$140.0m
US$149.8m
US$158.1m
US$165.5m
US$172.0m
US$178.0m
Growth Rate Estimate Source
Analyst x2
Analyst x3
Analyst x2
Analyst x1
Analyst x1
Est @ 6.97%
Est @ 5.59%
Est @ 4.63%
Est @ 3.95%
Est @ 3.48%
Present Value ($, Millions) Discounted @ 12%
US$57.1
US$10.7
US$14.0
US$81.9
US$80.9
US$77.6
US$73.4
US$68.9
US$64.2
US$59.5
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$588m
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. 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 12%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$2.0b÷ ( 1 + 12%)10= US$662m
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$3.5, the company appears a touch undervalued at a 24% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
NasdaqGS:WOOF Discounted Cash Flow July 22nd 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 Petco Health and Wellness Company 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 12%, which is based on a levered beta of 2.000. 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 Petco Health and Wellness Company
Strength
No major strengths identified for WOOF.
Weakness
Interest payments on debt are not well covered.
Shareholders have been diluted in the past year.
Opportunity
Forecast to reduce losses next year.
Good value based on P/S ratio and estimated fair value.
Significant insider buying over the past 3 months.
Have WOOF insiders been buying lately?
Threat
Debt is not well covered by operating cash flow.
Is WOOF well equipped to handle threats?
Moving On:
Although the valuation of a company is important, it is only one of many factors that you need to assess for 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. Can we work out why the company is trading at a discount to intrinsic value? For Petco Health and Wellness Company, we've compiled three important factors you should consider:
Risks: Consider for instance, the ever-present spectre of investment risk. We've identified 2 warning signs with Petco Health and Wellness Company (at least 1 which can't be ignored) , and understanding these should be part of your investment process.
Future Earnings: How does WOOF'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 NASDAQGS 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
NASDAQ:WOOFのPetco Health and Wellness Company, Inc.の内在価値からどの程度外れていますか?最新の財務データを使用して、将来のキャッシュフローを予想して現在価値に割引することにより、株式が公正に評価されているかどうかを確認します。これは、現在価値(DCF)モデルを使用して行われます。信じられないかもしれませんが、私たちの例からわかるように、あまり難しくありません!
企業の評価は重要な要素ですが、企業を評価するために必要な要素は多岐にわたります。DCFモデルは投資評価の全てではなく、むしろ株が過小評価または過大評価されるためにはどのような仮定が真実である必要があるかを示すガイドとして見る必要があります。会社が異なる速度で成長した場合、またはその資本コストやリスクフリーレートが急激に変化した場合、出力は大きく異なる可能性があります。なぜ企業が内在価値に対して割安な状態で取引されているかを理解できますか?Petco Health and Wellness Companyについて、考慮すべき3つの重要な要因をまとめました。
リスク:例えば、常に潜在的な投資リスクを考えてください。Petco Health and Wellness Companyについて、2つの警告シグナルを特定しました(少なくとも1つは無視できません)。これらを理解することは、投資プロセスの一部である必要があります。
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オーストラリアでは、moomooの投資商品及びサービスはMoomoo Securities Australia Limitedによって提供され、オーストラリア証券投資委員会(ASIC)の管理を受けております(AFSL No. 224663)。「金融サービスガイド」、「利用規約」、「プライバシーポリシー」などの詳細は、Moomoo Securities Australia Limitedのウェブサイトhttps://www.moomoo.com/auでご確認いただけます。