Calculating The Intrinsic Value Of Universal Electronics Inc. (NASDAQ:UEIC)

Key Insights

• The projected fair value for Universal Electronics is US$10.09 based on 2 Stage Free Cash Flow to Equity

• Current share price of US$10.13 suggests Universal Electronics is potentially trading close to its fair value

• The US$21.50 analyst price target for UEIC is 113% more than our estimate of fair value

Does the April share price for Universal Electronics Inc. (NASDAQ:UEIC) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Universal Electronics

The Calculation

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. In the first stage we need to estimate the cash flows to the business over the next ten years. 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

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF ($, Millions)	US$6.71m	US$13.9m	US$13.8m	US$13.8m	US$13.9m	US$14.1m	US$14.3m	US$14.5m	US$14.8m	US$15.0m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ -0.63%	Est @ 0.18%	Est @ 0.75%	Est @ 1.14%	Est @ 1.42%	Est @ 1.62%	Est @ 1.75%	Est @ 1.85%
Present Value ($, Millions) Discounted @ 12%	US$6.0	US$11.2	US$9.9	US$8.9	US$8.1	US$7.3	US$6.6	US$6.1	US$5.5	US$5.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$75m

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 a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.1%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 12%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$15m× (1 + 2.1%) ÷ (12%– 2.1%) = US$162m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$162m÷ ( 1 + 12%)¹⁰= US$54m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$129m. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$10.1, the company appears around fair value at the time of writing. 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

The Assumptions

We would 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 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 Universal Electronics 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 12%, which is based on a levered beta of 1.596. 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.

SWOT Analysis for Universal Electronics

Strength

• Debt is well covered by earnings.

Weakness

• Earnings declined over the past year.

• Expensive based on P/S ratio and estimated fair value.

Opportunity

• Annual earnings are forecast to grow faster than the American market.

• Significant insider buying over the past 3 months.

Threat

• Debt is not well covered by operating cash flow.

• Annual revenue is expected to decline over the next 2 years.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. It's not possible to obtain a foolproof valuation with a DCF model. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Universal Electronics, we've compiled three relevant factors you should assess:

1. Risks: As an example, we've found 3 warning signs for Universal Electronics that you need to consider before investing here.

2. Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for UEIC's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.

3. Other High Quality Alternatives: Do you like a good all-rounder? 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 valuation for every stock on the NASDAQGS every day. If you want to find the calculation for other stocks just search here.

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

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.

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