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Intrinsic Calculation For SunPower Corporation (NASDAQ:SPWR) Shows Investors Are Overpaying

How far off is SunPower Corporation (NASDAQ:SPWR) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by taking the foreast future cash flows of the company and discounting them back to todayâ€™s value. This is done using the discounted cash flows (DCF) model. It may sound complicated, but actually it is quite simple! If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. Please also note that this article was written in December 2018 so be sure check out the updated calculation by following the link below.

The method

Iâ€™m using the 2-stage growth model, which simply means we take in account two stages of companyâ€™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

 2019 2020 2021 2022 2023 Levered FCF (\$, Millions) \$96.85 \$101.89 \$95.51 \$89.54 \$83.94 Source Analyst x2 Analyst x3 Est @ -6.25% Est @ -6.25% Est @ -6.25% Present Value Discounted @ 17.05% \$82.74 \$74.37 \$59.56 \$47.70 \$38.20

Present Value of 5-year Cash Flow (PVCF)= US\$303m

After calculating the present value of future cash flows in the intial 5-year period we need to calculate the Terminal Value, which accounts for all the future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year â€˜growthâ€™ period, we discount this to todayâ€™s value at a cost of equity of 17.1%.

Terminal Value (TV) = FCF2022 Ã— (1 + g) Ã· (r â€“ g) = US\$84m Ã— (1 + 2.9%) Ã· (17.1% â€“ 2.9%) = US\$613m

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US\$613m Ã· ( 1 + 17.1%)5 = US\$279m

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\$582m. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of \$4.12. Compared to the current share price of \$5.39, the stock is quite expensive and not available at a discount at this time.

The assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you donâ€™t agree with my result, have a go at the calculation yourself and play with the assumptions. Because we are looking at SunPower 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 Iâ€™ve used 17.1%, which is based on a levered beta of 2. 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:

Whilst important, DCF calculation shouldnâ€™t be the only metric you look at when researching a company. What is the reason for the share price to differ from the intrinsic value? For SPWR, Iâ€™ve put together three pertinent factors you should further research:

1. Financial Health: Does SPWR 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 SPWRâ€™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 SPWR? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.