Johnson Outdoors Inc. Fair Value Estimate (NASDAQ: JOUT)
How far is Johnson Outdoors Inc. (NASDAQ: JOUT) from its intrinsic worth? Using the most recent financial data, we’ll examine whether the stock price is fair by taking expected future cash flows and discounting them to today’s value. To this end, we will take advantage of the Discounted Cash Flow (DCF) model. Believe it or not, it’s not too hard to follow, as you will see in our example!
There are many ways businesses can be assessed, so we would like to point out that a DCF is not perfect for all situations. Anyone who wants to learn a little more about intrinsic value should read the Simply Wall St.
We use what is called a two-step model, which simply means that we have two different periods of growth rate for the cash flow of the business. Usually, the first stage is higher growth, and the second stage is a lower growth stage. In the first step, we need to estimate the cash flow of the business over 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.
In general, we assume that a dollar today is worth more than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at an estimate of the present value:
10-year Free Cash Flow (FCF) estimate
|Leverage FCF ($, Millions)||$ 53.6 million||US $ 79.1 million||US $ 81.5 million||83.7 million US dollars||US $ 85.8 million||US $ 87.8 million||US $ 89.8 million||91.8 million US dollars||US $ 93.7 million||US $ 95.6 million|
|Source of growth rate estimate||Analyst x1||Analyst x1||Est @ 3.03%||East @ 2.71%||Is 2.5%||East @ 2.35%||Is @ 2.24%||Is @ 2.16%||Est @ 2.11%||East @ 2.08%|
|Present value (in millions of dollars) discounted at 8.1%||US $ 49.6||US $ 67.7||US $ 64.5||$ 61.3||US $ 58.1||US $ 55.0||US $ 52.0||US $ 49.1||US $ 46.4||US $ 43.8|
(“East” = FCF growth rate estimated by Simply Wall St)
10-year present value of cash flows (PVCF) = US $ 547 million
The second stage is also known as terminal value, this is the cash flow of the business after the first stage. For a number of reasons, a very conservative growth rate is used which 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 8.1%.
Terminal value (TV)= FCF2031 × (1 + g) ÷ (r – g) = US $ 96 million × (1 + 2.0%) ÷ (8.1% – 2.0%) = US $ 1.6 billion
Present value of terminal value (PVTV)= TV / (1 + r)ten= US $ 1.6 billion ÷ (1 + 8.1%)ten= US $ 727 million
Total value, or net worth, is then the sum of the present value of future cash flows, which in this case is $ 1.3 billion. The last step is then to divide the equity value by the number of shares outstanding. From the current share price of US $ 107, the company appears to be roughly at fair value with a 15% discount from the current share price. Ratings are imprecise instruments, however, much like a telescope – move a few degrees and end up in another galaxy. Keep this in mind.
NasdaqGS: JOUT Discounted cash flow September 26, 2021
We draw your attention to the fact that 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 entries, I recommend that you redo the calculations yourself and play 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 complete picture of a company’s potential performance. Since we view Johnson Outdoors 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 8.1%, which is based on a leveraged beta of 1.301. 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 from globally comparable companies, with a limit imposed between 0.8 and 2.0, which is a reasonable range for a stable business.
Valuation is only one side of the coin in terms of building your investment thesis, and ideally, it won’t be the only piece of analysis you look at for a business. The DCF model is not a perfect equity valuation tool. Instead, the best use of a DCF model is to test certain assumptions and theories to see if they would lead to undervaluation or overvaluation of the company. For example, if the terminal value growth rate is adjusted slightly, it can dramatically change the overall result. For Johnson Outdoors, we’ve compiled three other aspects that you should dig deeper into:
- Risks: Be aware that Johnson Outdoors shows 1 warning sign in our investment analysis , you must know…
- Future benefits: How does JOUT’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. Simply Wall St updates its DCF calculation for every US stock every day, so if you want to find the intrinsic value of any other stock just search here.
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 shares 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 material. Simply Wall St has no position in the mentioned stocks.
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