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Estimating The Intrinsic Value Of Wabash National Corporation (NYSE:WNC)

Jonathon Baker

I am going to run you through how I calculated the intrinsic value of Wabash National Corporation (NYSE:WNC) by estimating the company’s future cash flows and discounting them to their present value. I will use the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. If you are reading this and its not August 2018 then I highly recommend you check out the latest calculation for Wabash National by following the link below.

Check out our latest analysis for Wabash National

The model

I’m 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 with we have to get estimates of the next five years of cash flows. For this I used the consensus of the analysts covering the stock, as you can see below. I then discount this to its value today and sum up the total to get the present value of these cash flows.

5-year cash flow forecast

2018 2019 2020 2021 2022
Levered FCF ($, Millions) $114.86 $111.18 $113.28 $115.42 $117.61
Source Analyst x2 Analyst x2 Est @ 1.89% Est @ 1.89% Est @ 1.89%
Present Value Discounted @ 11.37% $103.13 $89.63 $82.00 $75.02 $68.63

Present Value of 5-year Cash Flow (PVCF)= US$418.40m

The second stage is also known as Terminal Value, this is the business’s cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 11.4%.

Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$117.61m × (1 + 2.9%) ÷ (11.4% – 2.9%) = US$1.44b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$1.44b ÷ ( 1 + 11.4%)5 = US$838.64m

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$1.26b. In the final step we divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) or ADR then we use the equivalent number. This results in an intrinsic value of $21.97. Relative to the current share price of $18.56, the stock is about right, perhaps slightly undervalued at a 15.53% discount to what it is available for right now.

NYSE:WNC Intrinsic Value Export August 17th 18

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Wabash National as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 11.4%, which is based on a levered beta of 1.195. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. For WNC, there are three relevant factors you should further examine:

  1. Financial Health: Does WNC 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 WNC’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 High Quality Alternatives: Are there other high quality stocks you could be holding instead of WNC? 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 NYSE every 6 hours. If you want to find the calculation for other stocks just search here.

To help readers see past 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. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.