A Look At The Fair Value Of Papa Murphy’s Holdings Inc (FRSH)
I am going to run you through how I calculated the intrinsic value of Papa Murphy’s Holdings Inc (NASDAQ:FRSH) 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 November 2017 so be sure check the latest calculation for Papa Murphy’s Holdings here.
Is FRSH 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. Generally I like to use analyst consensus estimates for free cash flow, but given that FRSH 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 cost of equity of 15.34%. This resulted in a present value of 5-year cash flow of $43M. Keen to understand how I calculated this value? Check out our detailed analysis here.
The graph above shows how FRSH’s earnings are expected to move in the future, which should give you some color on FRSH’s outlook. Next, I calculate 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. Discounting the terminal value back five years gives us a present value of $66M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $110M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $6.47, which, compared to the current share price of $5.54, we see that Papa Murphy’s Holdings is about right, perhaps slightly undervalued at a 14.44% discount to what it is available for right now.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For FRSH, there are three fundamental aspects you should further examine:
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.
