Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Electronics for Imaging Inc (NASDAQ:EFII) as an investment opportunity. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after April 2018 then I highly recommend you check out the latest calculation for Electronics for Imaging here.
Is EFII fairly valued?
We are going to use a two-stage DCF 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 perpetual stable growth rate. Firstly, I pulled together the analyst consensus forecast of EFII’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 11.59%. 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 US$358.69M. Keen to understand how I arrived at this number? Take a look at our detailed analysis here.
The graph above shows how EFII’s earnings are expected to move going forward, which should give you an idea of EFII’s outlook. Secondly, I determine the terminal value, which is the business’s cash flow after the first stage. I’ve decided to use the 10-year government bond rate of 2.8% as the steady 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 US$719.57M.
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$1.08B. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $23.96, which, compared to the current share price of $29.15, we find that Electronics for Imaging is fair value, maybe slightly overvalued and not available at a discount at this time.
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For EFII, I’ve put together three relevant aspects you should further examine:
- Financial Health: Does EFII 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 EFII’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 EFII? 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.