I am going to run you through how I calculated the intrinsic value of Insteel Industries Inc (NASDAQ:IIIN) using the discounted cash flow (DCF) method. 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 January 2018 so be sure check the latest calculation for Insteel Industries here.
Is IIIN fairly valued?
I’ve used the 2-stage growth model, which takes into account the initial higher growth stage of a company’s life cycle and the steadier growth phase over the long run. Firstly, I use the analyst consensus estimates of IIIN’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.73%. 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 $185.0M. Want to understand how I calculated this value? Check out our detailed analysis here.
Above is a visual representation of how IIIN’s top and bottom lines are expected to move in the future, which should give you some color on IIIN’s outlook. Now we need to determine the terminal value, which is the business’s cash flow after the first stage. I think it’s suitable to use the 10-year government bond rate of 2.8% as the perpetual growth rate, which is rightly below GDP growth, but more towards the conservative side. The present value of the terminal value after discounting it back five years is $546.7M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $731.7M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $38.43, which, compared to the current share price of $29.26, we see that Insteel Industries is about right, perhaps slightly undervalued at a 23.86% discount to what it is available for right now.
Although the valuation of a company is important, it shouldn’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 IIIN, there are three key aspects you should further examine:
- 1. Financial Health: Does IIIN 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 IIIN’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.
- 2. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of IIIN? 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 NASDAQ 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.