U.S. markets open in 7 hours 43 minutes
  • S&P Futures

    4,434.50
    -3.50 (-0.08%)
     
  • Dow Futures

    34,619.00
    -25.00 (-0.07%)
     
  • Nasdaq Futures

    15,274.00
    -29.50 (-0.19%)
     
  • Russell 2000 Futures

    2,254.90
    -0.30 (-0.01%)
     
  • Crude Oil

    73.47
    +0.17 (+0.23%)
     
  • Gold

    1,752.20
    +2.40 (+0.14%)
     
  • Silver

    22.67
    -0.01 (-0.06%)
     
  • EUR/USD

    1.1741
    -0.0006 (-0.05%)
     
  • 10-Yr Bond

    1.4100
    0.0000 (0.00%)
     
  • Vix

    18.63
    -2.24 (-10.73%)
     
  • GBP/USD

    1.3718
    -0.0003 (-0.02%)
     
  • USD/JPY

    110.4600
    +0.1590 (+0.14%)
     
  • BTC-USD

    44,155.82
    +298.41 (+0.68%)
     
  • CMC Crypto 200

    1,102.45
    -6.47 (-0.58%)
     
  • FTSE 100

    7,078.35
    -5.02 (-0.07%)
     
  • Nikkei 225

    30,237.07
    +597.67 (+2.02%)
     

An Intrinsic Calculation For MasterCraft Boat Holdings, Inc. (NASDAQ:MCFT) Suggests It's 24% Undervalued

  • Oops!
    Something went wrong.
    Please try again later.
·6 min read
In this article:
  • Oops!
    Something went wrong.
    Please try again later.

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of MasterCraft Boat Holdings, Inc. (NASDAQ:MCFT) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. It may sound complicated, but actually it is quite simple!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for MasterCraft Boat Holdings

Crunching the numbers

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) estimate

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

Levered FCF ($, Millions)

US$25.3m

US$45.7m

US$47.5m

US$49.1m

US$50.6m

US$52.0m

US$53.4m

US$54.7m

US$56.1m

US$57.4m

Growth Rate Estimate Source

Analyst x1

Analyst x1

Est @ 3.93%

Est @ 3.42%

Est @ 3.06%

Est @ 2.81%

Est @ 2.63%

Est @ 2.51%

Est @ 2.42%

Est @ 2.36%

Present Value ($, Millions) Discounted @ 11%

US$22.9

US$37.3

US$35.0

US$32.7

US$30.5

US$28.3

US$26.2

US$24.3

US$22.5

US$20.8

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$280m

After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 (2.2%) 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 11%.

Terminal Value (TV)= FCF2030 × (1 + g) ÷ (r – g) = US$57m× (1 + 2.2%) ÷ (11%– 2.2%) = US$692m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$692m÷ ( 1 + 11%)10= US$251m

The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$531m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$21.2, the company appears a touch undervalued at a 24% discount to where the stock price trades currently. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.

dcf
dcf

Important assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own assumptions. 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 MasterCraft Boat 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 11%, which is based on a levered beta of 1.410. 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.

Moving On:

Valuation is only one side of the coin in terms of building your investment thesis, and it 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. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. If a company grows at a different rate, or if its cost of equity or risk free rate changes sharply, the output can look very different. Why is the intrinsic value higher than the current share price? For MasterCraft Boat Holdings, there are three important elements you should look at:

  1. Risks: You should be aware of the 1 warning sign for MasterCraft Boat Holdings we've uncovered before considering an investment in the company.

  2. Future Earnings: How does MCFT'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.

This article by Simply Wall St is general in nature. 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com.