A Look At The Fair Value Of CVD Equipment Corporation (NASDAQ:CVV)
Key Insights
The projected fair value for CVD Equipment is US$5.07 based on 2 Stage Free Cash Flow to Equity
CVD Equipment's US$5.49 share price indicates it is trading at similar levels as its fair value estimate
Industry average of 55% suggests CVD Equipment's peers are currently trading at a higher premium to fair value
Today we will run through one way of estimating the intrinsic value of CVD Equipment Corporation (NASDAQ:CVV) by projecting its future cash flows and then discounting them to today's value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
View our latest analysis for CVD Equipment
Is CVD Equipment Fairly Valued?
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To begin with, we have to get estimates of the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | |
Levered FCF ($, Millions) | US$1.07m | US$1.40m | US$1.72m | US$2.00m | US$2.24m | US$2.45m | US$2.62m | US$2.76m | US$2.89m | US$3.00m |
Growth Rate Estimate Source | Est @ 43.81% | Est @ 31.31% | Est @ 22.56% | Est @ 16.44% | Est @ 12.15% | Est @ 9.15% | Est @ 7.05% | Est @ 5.58% | Est @ 4.55% | Est @ 3.83% |
Present Value ($, Millions) Discounted @ 8.6% | US$1.0 | US$1.2 | US$1.3 | US$1.4 | US$1.5 | US$1.5 | US$1.5 | US$1.4 | US$1.4 | US$1.3 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$14m
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 8.6%.
Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$3.0m× (1 + 2.2%) ÷ (8.6%– 2.2%) = US$48m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$48m÷ ( 1 + 8.6%)10= US$21m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$35m. 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$5.5, the company appears around fair value at the time of writing. 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.
Important 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 CVD Equipment 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 8.6%, which is based on a levered beta of 1.283. 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:
Whilst important, the DCF calculation is only one of many factors that you need to assess for a company. DCF models are not the be-all and end-all of investment valuation. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For CVD Equipment, we've compiled three pertinent aspects you should further examine:
Risks: Case in point, we've spotted 4 warning signs for CVD Equipment you should be aware of.
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!
Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!
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.
