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Calculating The Intrinsic Value Of The Container Store Group Inc (NYSE:TCS)

Today I will be providing a simple run through of a valuation method used to estimate the attractiveness of The Container Store Group Inc (NYSE:TCS) as an investment opportunity by taking the expected future cash flows and discounting them to their present value. I will use the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not June 2018 then I highly recommend you check out the latest calculation for Container Store Group by following the link below. See our latest analysis for Container Store Group

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 begin with we have to get estimates of 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 the sum of these cash flows to arrive at a present value estimate.

5-year cash flow forecast

2018

2019

2020

2021

2022

Levered FCF ($, Millions)

$45.05

$33.45

$36.50

$45.20

$52.20

Source

Analyst x2

Analyst x2

Analyst x2

Analyst x1

Analyst x1

Present Value Discounted @ 11.61%

$40.36

$26.85

$26.25

$29.13

$30.14

Present Value of 5-year Cash Flow (PVCF)= US$152.74m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 11.6%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$52.20m × (1 + 2.9%) ÷ (11.6% – 2.9%) = US$620.63m

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$620.63m ÷ ( 1 + 11.6%)5 = US$358.38m

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 US$511.12m. The last step is to then 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) then we use the equivalent number. This results in an intrinsic value of $10.58. Compared to the current share price of $8.66, the stock is about right, perhaps slightly undervalued at a 18.17% discount to what it is available for right now.

NYSE:TCS Intrinsic Value June 21st 18
NYSE:TCS Intrinsic Value June 21st 18

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the 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 Container Store Group 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 11.6%, which is based on a levered beta of 1.228. 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:

Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.

For TCS, I’ve compiled three pertinent factors you should further examine:

  1. Financial Health: Does TCS 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.

  2. Future Earnings: How does TCS’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.

  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of TCS? 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 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.

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