Today I will be providing a simple run-through of the discounted cash flows (DCF) method to forecast the attractiveness of Interface Inc (NASDAQ:TILE) 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. Also note that this article was written in February 2018 so be sure check the latest calculation for Interface here.
Crunching the numbers
I will be 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 perpetual stable growth rate. To begin, I pulled together the analyst consensus estimates of TILE’s levered free cash flow (FCF) over the next five years and discounted these figures at the cost of equity of 8.49%. This resulted in a present value of 5-year cash flow of $350.0M. Want to know how I calculated this value? Check out our detailed analysis here.
The graph above shows how TILE’s earnings are expected to move going forward, which should give you an idea of TILE’s outlook. Secondly, I calculate the terminal value, which is the business’s cash flow after the first stage. 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 $1,210.8M.
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 $1,560.7M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $25.90, which, compared to the current share price of $23.65, we see that Interface is about right, perhaps slightly undervalued at a 8.70% 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 TILE, there are three pertinent factors you should further research:
- 1. Financial Health: Does TILE 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 TILE’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.
- 2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of TILE? 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 for every stock on the NASDAQ every 6 hours. If you want to find the calculation for other stocks 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.