How far off is Rocky Mountain Dealerships Inc (TSX:RME) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. 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 May 2018 so be sure check the latest calculation for Rocky Mountain Dealerships here.
What’s the value?
I’ve used the 2-stage growth model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. To start off, I took the analyst consensus forecast of RME’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 17.87%. 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 CA$99.51M. Keen to know how I calculated this value? Read our detailed analysis here.
The graph above shows how RME’s earnings are expected to move going forward, which should give you some color on RME’s outlook. Next, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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. Discounting the terminal value back five years gives us a present value of CA$93.55M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CA$193.05M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of CA$9.71, which, compared to the current share price of CA$11.34, we see that Rocky Mountain Dealerships 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.
For RME, there are three pertinent factors you should further research:
- Financial Health: Does RME 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 RME’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 RME? 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 TSX 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.