A Look At The Fair Value Of Coda Octopus Group, Inc. (NASDAQ:CODA)
Key Insights
Coda Octopus Group's estimated fair value is US$6.60 based on 2 Stage Free Cash Flow to Equity
Current share price of US$7.64 suggests Coda Octopus Group is potentially trading close to its fair value
When compared to theindustry average discount of -88%, Coda Octopus Group's competitors seem to be trading at a greater premium to fair value
In this article we are going to estimate the intrinsic value of Coda Octopus Group, Inc. (NASDAQ:CODA) by taking the expected future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
View our latest analysis for Coda Octopus Group
Crunching The Numbers
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. In the first stage we need to estimate the cash flows to the business over the next ten years. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$3.75m | US$3.91m | US$4.04m | US$4.17m | US$4.29m | US$4.40m | US$4.51m | US$4.62m | US$4.72m | US$4.83m |
Growth Rate Estimate Source | Est @ 4.96% | Est @ 4.12% | Est @ 3.53% | Est @ 3.11% | Est @ 2.82% | Est @ 2.62% | Est @ 2.48% | Est @ 2.38% | Est @ 2.31% | Est @ 2.26% |
Present Value ($, Millions) Discounted @ 7.5% | US$3.5 | US$3.4 | US$3.3 | US$3.1 | US$3.0 | US$2.8 | US$2.7 | US$2.6 | US$2.5 | US$2.3 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$29m
The second stage is also known as Terminal Value, this is the business's cash flow after 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 7.5%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$4.8m× (1 + 2.2%) ÷ (7.5%– 2.2%) = US$92m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$92m÷ ( 1 + 7.5%)10= US$44m
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$73m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$7.6, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the 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 Coda Octopus Group 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 7.5%, which is based on a levered beta of 1.078. 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.
SWOT Analysis for Coda Octopus Group
Strength
Earnings growth over the past year exceeded the industry.
Currently debt free.
Weakness
Shareholders have been diluted in the past year.
Opportunity
Annual earnings are forecast to grow faster than the American market.
Good value based on P/E ratio compared to estimated Fair P/E ratio.
Threat
No apparent threats visible for CODA.
Looking Ahead:
Whilst important, the DCF calculation shouldn't be the only metric you look at when researching a company. It's not possible to obtain a foolproof valuation with a DCF model. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Coda Octopus Group, there are three pertinent elements you should further examine:
Risks: For example, we've discovered 2 warning signs for Coda Octopus Group that you should be aware of before investing here.
Future Earnings: How does CODA'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.
Other High Quality Alternatives: Do you like a good all-rounder? 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 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.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.
