Tapestry's estimated fair value is US$74.78 based on 2 Stage Free Cash Flow to Equity
Tapestry's US$41.66 share price signals that it might be 44% undervalued
Analyst price target for TPR is US$49.17 which is 34% below our fair value estimate
Does the August share price for Tapestry, Inc. (NYSE:TPR) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
The Model
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$1.02b
US$1.16b
US$1.23b
US$1.25b
US$1.28b
US$1.31b
US$1.34b
US$1.37b
US$1.40b
US$1.43b
Growth Rate Estimate Source
Analyst x5
Analyst x5
Analyst x2
Analyst x1
Analyst x1
Est @ 2.18%
Est @ 2.27%
Est @ 2.34%
Est @ 2.39%
Est @ 2.42%
Present Value ($, Millions) Discounted @ 9.1%
US$931
US$974
US$947
US$882
US$826
US$773
US$725
US$680
US$638
US$598
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$8.0b
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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 9.1%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$22b÷ ( 1 + 9.1%)10= US$9.2b
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$17b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$41.7, the company appears quite undervalued at a 44% 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
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Tapestry 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 9.1%, which is based on a levered beta of 1.611. 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 Tapestry
Strength
Debt is well covered by earnings.
Dividends are covered by earnings and cash flows.
Dividend information for TPR.
Weakness
Earnings declined over the past year.
Dividend is low compared to the top 25% of dividend payers in the Luxury market.
Opportunity
Annual earnings are forecast to grow for the next 3 years.
Good value based on P/E ratio and estimated fair value.
Threat
Debt is not well covered by operating cash flow.
Annual earnings are forecast to grow slower than the American market.
Is TPR 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. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For Tapestry, we've compiled three pertinent elements you should explore:
Risks: Be aware that Tapestry is showing 1 warning sign in our investment analysis , you should know about...
Future Earnings: How does TPR'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. 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.
主要見解
tapestry的預估公允價值爲74.78美元,基於兩個階段的自由現金流向股東權益模型
tapestry的41.66美元股價表明其可能被低估44%
分析師對TPR的價格目標爲49.17美元,比我們的公允價值估計低34%
八月份tapestry, Inc. (NYSE:TPR)的股價反映了其真正價值嗎?今天,我們將通過預計的未來現金流量並將其貼現至今天的價值來估計這隻股票的內在價值。我們的分析將採用貼現現金流量模型。像這樣的模型可能超出 lay 人的理解,但它們是相當容易理解的。