U.S. Markets closed
  • S&P 500

    4,422.30
    +10.51 (+0.24%)
     
  • Dow 30

    35,144.31
    +82.76 (+0.24%)
     
  • Nasdaq

    14,840.71
    +3.72 (+0.03%)
     
  • Russell 2000

    2,216.92
    +7.27 (+0.33%)
     
  • Crude Oil

    72.19
    +0.12 (+0.17%)
     
  • Gold

    1,797.20
    -4.60 (-0.26%)
     
  • Silver

    25.25
    +0.01 (+0.05%)
     
  • EUR/USD

    1.1811
    +0.0040 (+0.3425%)
     
  • 10-Yr Bond

    1.2760
    -0.0100 (-0.78%)
     
  • Vix

    17.58
    +0.38 (+2.21%)
     
  • GBP/USD

    1.3818
    +0.0064 (+0.4684%)
     
  • USD/JPY

    110.3480
    -0.1620 (-0.1466%)
     
  • BTC-USD

    37,704.95
    +3,291.61 (+9.56%)
     
  • CMC Crypto 200

    905.01
    -10.48 (-1.14%)
     
  • FTSE 100

    7,025.43
    -2.15 (-0.03%)
     
  • Nikkei 225

    27,833.29
    +285.29 (+1.04%)
     

Calculating The Intrinsic Value Of Solaris Oilfield Infrastructure, Inc. (NYSE:SOI)

·5 min read

How far off is Solaris Oilfield Infrastructure, Inc. (NYSE:SOI) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by taking the forecast future cash flows of the company and discounting them back to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. There's really not all that much to it, even though it might appear quite complex.

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. If you still have some burning questions about this type of valuation, take a look at the Simply Wall St analysis model.

View our latest analysis for Solaris Oilfield Infrastructure

Crunching the numbers

We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$6.13m

US$25.5m

US$36.0m

US$42.0m

US$45.0m

US$47.3m

US$49.2m

US$50.9m

US$52.5m

US$53.9m

Growth Rate Estimate Source

Analyst x3

Analyst x3

Analyst x1

Analyst x1

Analyst x1

Est @ 5.04%

Est @ 4.13%

Est @ 3.49%

Est @ 3.04%

Est @ 2.72%

Present Value ($, Millions) Discounted @ 9.4%

US$5.6

US$21.3

US$27.5

US$29.3

US$28.7

US$27.6

US$26.3

US$24.8

US$23.4

US$22.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$236m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 2.0%. We discount the terminal cash flows to today's value at a cost of equity of 9.4%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$54m× (1 + 2.0%) ÷ (9.4%– 2.0%) = US$742m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$742m÷ ( 1 + 9.4%)10= US$302m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$538m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$9.9, the company appears about fair value at a 16% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

The assumptions

Now 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 inputs, I recommend redoing the calculations yourself and playing with them. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Solaris Oilfield Infrastructure 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 accounts for debt. In this calculation we've used 9.4%, which is based on a levered beta of 1.569. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Although the valuation of a company is important, it is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Solaris Oilfield Infrastructure, there are three relevant aspects you should explore:

  1. Risks: To that end, you should be aware of the 3 warning signs we've spotted with Solaris Oilfield Infrastructure .

  2. Future Earnings: How does SOI'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 Solid Businesses: 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 business fundamentals to see if there are other companies you may not have considered!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NYSE every day. If you want to find the calculation for other stocks just search here.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.