A look at the intrinsic value of Sarcos Technology and Robotics Corporation (NASDAQ: STRC)
Does Sarcos Technology and Robotics Corporation (NASDAQ: STRC) December share price reflect its true value? Today, we’re going to estimate the intrinsic value of the stock by estimating the company’s future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. It may sound complicated, but it’s actually quite simple!
We generally think of a business’s value as the present value of all the cash it will generate in the future. However, a DCF is only one evaluation measure among many, and it is not without its flaws. For those who are passionate about equity analysis, the Simply Wall St analysis template here may be something of interest to you.
Check out our latest review for Sarcos Technology and Robotics
The calculation
We use the 2-step growth model, which simply means that we take into account two stages of business growth. During the initial period, the business can have a higher growth rate, and the second stage is usually assumed to have a stable growth rate. To begin with, we need to get cash flow estimates for the next ten years. Where possible, we use analyst estimates, but when these are not available, we extrapolate the previous free cash flow (FCF) from the last estimate or stated value. We assume that companies with decreasing free cash flow will slow their rate of contraction, and companies with increasing free cash flow will see their growth rate slow during this period. We do this to reflect the fact that growth tends to slow down more in the early years than in subsequent years.
A DCF is based on the idea that a dollar in the future is worth less than a dollar today, so we discount the value of those future cash flows to their estimated value in today’s dollars. hui:
10-year free cash flow (FCF) forecast
2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |
Leverage FCF ($, Millions) | -59.7 million US dollars | -74.8 million US dollars | -50.8 million US dollars | US $ 38.0 million | $ 53.3 million | 68.7 million US dollars | 82.9 million US dollars | US $ 95.5 million | US $ 106.1 million | US $ 115.0 million |
Source of estimated growth rate | Analyst x3 | Analyst x3 | Analyst x2 | Analyst x1 | Est @ 40.31% | Est @ 28.81% | Is @ 20.75% | Is 15.12% | Est @ 11.17% | Est @ 8.41% |
Present value (in millions of dollars) discounted at 6.5% | – $ 56.1 | – $ 66.0 | – $ 42.1 | $ 29.6 | US $ 39.0 | US $ 47.1 | US $ 53.5 | US $ 57.8 | US $ 60.4 | US $ 61.5 |
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = 184 million US dollars
After calculating the present value of future cash flows over the initial 10 year period, we need to calculate the terminal value, which takes into account all future cash flows beyond the first step. 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 used the 5-year average of the 10-year government bond yield (2.0%) to estimate future growth. Similar to the 10-year “growth” period, we discount future cash flows to their present value, using a cost of equity of 6.5%.
Terminal value (TV)= FCF_{2031} × (1 + g) ÷ (r – g) = US $ 115 million × (1 + 2.0%) ÷ (6.5% – 2.0%) = US $ 2.6 billion
Present value of terminal value (PVTV)= TV / (1 + r)^{ten}= 2.6 billion US dollars ÷ (1 + 6.5%)^{ten}= US $ 1.4 billion
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 1.6 billion. To get the intrinsic value per share, we divide it by the total number of shares outstanding. From the current share price of $ 9.5, the company appears to be roughly at fair value with a 17% discount to the current share price. Remember, however, that this is only a rough estimate, and like any complex formula – trash in, trash out.
Important assumptions
The above calculation is very dependent on two assumptions. One is the discount rate and the other is the cash flow. You don’t have to agree with these entries, I recommend that you redo the calculations yourself and play around with them. The DCF also does not take into account the possible cyclicality of an industry or the future capital needs of a company, so it does not give a full picture of a company’s potential performance. Since we view Sarcos Technology and Robotics 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 takes into account debt. In this calculation, we used 6.5%, which is based on a leveraged beta of 1.030. Beta is a measure of the volatility of a stock relative to the market as a whole. We get our beta from the industry average beta of comparable companies globally, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable company.
Looking forward:
Valuation is only one side of the coin in terms of building your investment thesis, and it’s just one of the many factors you need to evaluate for a business. The DCF model is not a perfect stock assessment tool. Rather, it should be seen as a guide to “what assumptions must be true for this stock to be under / overvalued?” For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For Sarcos Technology and Robotics, there are three important things to consider:
- Risks: As an example, we have found 1 warning sign for Sarcos Technology and Robotics that you need to consider before investing here.
- Future benefits: How does STRC’s growth rate compare to that of its peers and the broader market? Dig deeper into the analyst consensus number for years to come by interacting with our free analyst growth expectations chart.
- Other strong companies: 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 trading fundamentals to see if there are other companies you may not have considered!
PS. The Simply Wall St app performs a daily discounted cash flow assessment for each NASDAQGM share. If you want to find the calculation for other actions, just search here.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.