In this article I am going to calculate the intrinsic value of Bassett Furniture Industries Incorporated (NASDAQ:BSET) using the discounted cash flows (DCF) model. 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 Bassett Furniture Industries here.
Is BSET fairly valued?
I will be 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. Generally I like to use analyst consensus estimates for free cash flow, but given that BSET has low analyst coverage with no forecast available, I have extrapolated the most recent reported free cash flow (FCF) based on the average annual revenue growth over the past five years, capped at a reasonable level, and discounted these figures at the rate of 9.63%. This resulted in a present value of 5-year cash flow of $113.9M. Keen to understand how I arrived at this number? Read our detailed analysis here.
The graph above shows how BSET’s top and bottom lines are expected to move going forward, which should give you an idea of BSET’s outlook. Then, I determine the terminal value, which is the business’s cash flow after the first stage. It’s appropriate to use the 10-year government bond rate of 2.8% as the stable growth rate, which is rightly below GDP growth, but more towards the conservative side. After discounting the terminal value back five years, the present value becomes $332.8M.
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 $446.7M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $41.61, which, compared to the current share price of $35.45, we see that Bassett Furniture Industries is about right, perhaps slightly undervalued at a 14.81% 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.
For BSET, I’ve put together three fundamental factors you should further examine:
- 1. Financial Health: Does BSET 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 BSET’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 BSET? 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.