Estimating The Intrinsic Value Of Sportsman's Warehouse Holdings, Inc. (NASDAQ:SPWH)

Key Insights

• Sportsman's Warehouse Holdings' estimated fair value is US$4.24 based on 2 Stage Free Cash Flow to Equity

• Current share price of US$4.83 suggests Sportsman's Warehouse Holdings is potentially trading close to its fair value

• The US$9.38 analyst price target for SPWH is 121% more than our estimate of fair value

In this article we are going to estimate the intrinsic value of Sportsman's Warehouse Holdings, Inc. (NASDAQ:SPWH) by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.

Check out our latest analysis for Sportsman's Warehouse Holdings

Is Sportsman's Warehouse Holdings Fairly Valued?

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. To start off with, we need to estimate the next ten years of cash flows. 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.

A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) forecast

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF ($, Millions)	US$57.0k	-US$6.17m	US$5.50m	US$9.71m	US$15.0m	US$20.8m	US$26.5m	US$31.8m	US$36.5m	US$40.4m
Growth Rate Estimate Source	Analyst x1	Analyst x2	Analyst x2	Est @ 76.60%	Est @ 54.25%	Est @ 38.61%	Est @ 27.66%	Est @ 20.00%	Est @ 14.63%	Est @ 10.87%
Present Value ($, Millions) Discounted @ 14%	US$0.05	-US$4.7	US$3.7	US$5.8	US$7.8	US$9.5	US$10.6	US$11.2	US$11.2	US$10.9

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$66m

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 14%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = US$40m× (1 + 2.1%) ÷ (14%– 2.1%) = US$347m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$347m÷ ( 1 + 14%)¹⁰= US$94m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$160m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$4.8, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

dcf

Important Assumptions

Now 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 Sportsman's Warehouse Holdings 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 14%, which is based on a levered beta of 2.000. 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 Sportsman's Warehouse Holdings

Strength

• Debt is well covered by earnings.

Weakness

• Earnings declined over the past year.

Opportunity

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

• Good value based on P/E ratio compared to estimated Fair P/E ratio.

• Significant insider buying over the past 3 months.

Threat

• Debt is not well covered by operating cash flow.

• Annual revenue is forecast to grow slower than the American market.

Moving On:

Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Sportsman's Warehouse Holdings, there are three fundamental elements you should look at:

1. Risks: Case in point, we've spotted 2 warning signs for Sportsman's Warehouse Holdings you should be aware of, and 1 of them is potentially serious.

2. Future Earnings: How does SPWH'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.

3. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

PS. Simply Wall St updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock 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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