I am going to run you through how I calculated the intrinsic value of HNI Corporation (NYSE:HNI) using the discounted cash flow (DCF) method. 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 HNI here.
Is HNI fairly valued?
We are going to use a two-stage DCF model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. To start off, I use the analyst consensus forecast of HNI’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 8.59%. This resulted in a present value of 5-year cash flow of US$423.50M. Want to understand how I arrived at this number? Take a look at our detailed analysis here.
The infographic above illustrates how HNI’s top and bottom lines are expected to move in the future, which should give you some color on HNI’s outlook. Now we need to determine the terminal value, which accounts for all the future cash flows after the five years. I think it’s suitable to use the 10-year government bond rate of 2.8% as the stable 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$1.32B.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$1.74B. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $39.98, which, compared to the current share price of $37.21, we see that HNI is about right, perhaps slightly undervalued at a 6.94% discount to what it is available for right now.
Whilst important, DCF calculation shouldn’t be the only metric you look at when researching a company.
For HNI, I’ve put together three key aspects you should further research:
- Financial Health: Does HNI 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 HNI’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 HNI? 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.