Calculating The Intrinsic Value Of Badger Daylighting Ltd (TSE:BAD)
Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Badger Daylighting Ltd (TSX:BAD) as an investment opportunity. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Also note that this article was written in June 2018 so be sure check the latest calculation for Badger Daylighting here.
What’s the value?
We are going to use a two-stage DCF model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. To begin, I pulled together the analyst consensus forecast of BAD’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.59%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of CA$187.04M. Want to know how I arrived at this number? Take a look at our detailed analysis here.
Above is a visual representation of how BAD’s earnings are expected to move going forward, which should give you an idea of BAD’s outlook. Secondly, I determine the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes CA$780.94M.
The total value is the sum of cash flows for the next five years and the discounted terminal value, which results in the Total Equity Value, which in this case is CA$967.98M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of CA$26.09, which, compared to the current share price of CA$30.53, we find that Badger Daylighting is fair value, maybe slightly overvalued and not available at a discount at this time.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For BAD, I’ve compiled three key factors you should look at:
Financial Health: Does BAD 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 BAD’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 BAD? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the TSX every 6 hours. If you want to find the calculation for other stocks just search here.
To help readers see pass 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.
