Calculating The Fair Value Of Comfort Systems USA Inc (NYSE:FIX)
In this article I am going to calculate the intrinsic value of Comfort Systems USA Inc (NYSE:FIX) by taking the expected future cash flows and discounting them to today’s value. I will use the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in September 2018 so be sure check out the updated calculation by following the link below.
See our latest analysis for Comfort Systems USA
Step by step through the calculation
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 five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.
5-year cash flow forecast
2019 | 2020 | 2021 | 2022 | 2023 | |
Levered FCF ($, Millions) | $108.30 | $116.25 | $124.78 | $133.94 | $143.77 |
Source | Analyst x2 | Est @ 7.34% | Est @ 7.34% | Est @ 7.34% | Est @ 7.34% |
Present Value Discounted @ 8.91% | $99.44 | $98.00 | $96.58 | $95.18 | $93.81 |
Present Value of 5-year Cash Flow (PVCF)= US$483.0m
The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 8.9%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$143.8m × (1 + 2.9%) ÷ (8.9% – 2.9%) = US$2.48b
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$2.48b ÷ ( 1 + 8.9%)5 = US$1.62b
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$2.10b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of $56.75. Relative to the current share price of $56.9, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.
The assumptions
I’d like to point out 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 my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Comfort Systems USA as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 8.9%, which is based on a levered beta of 0.846. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. For FIX, I’ve put together three essential aspects you should look at:
Financial Health: Does FIX have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
Future Earnings: How does FIX’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of FIX? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
