A Look At The Intrinsic Value Of Ethan Allen Interiors Inc (NYSE:ETH)
In this article I am going to calculate the intrinsic value of Ethan Allen Interiors Inc (NYSE:ETH) using the discounted cash flows (DCF) model. If you want to learn more about this method, the basis for my calculations can be found in detail in the Simply Wall St analysis model. If you are reading this after January 2018 then I highly recommend you check out the latest calculation for Ethan Allen Interiors here.
Is ETH fairly valued?
I will be using the 2-stage growth model, which simply means we have two different periods of varying growth rates for the company’s cash flows. Generally the initial phase has higher growth rates that plateau over time. Firstly, I pulled together the analyst consensus estimates of ETH’s levered free cash flow (FCF) over the next five years and discounted these figures at the rate of 9.64%. This resulted in a present value of 5-year cash flow of $206.3M. Keen to understand how I calculated this value? Take a look at our detailed analysis here.
The infographic above illustrates how ETH’s earnings are expected to move in the future, which should give you some color on ETH’s outlook. Secondly, I determine the terminal value, which accounts for all the future cash flows after the five years. I’ve decided to use the 10-year government bond rate of 2.8% as the steady 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 $630.5M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is $836.8M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $30.46, which, compared to the current share price of $27.05, we see that Ethan Allen Interiors is about right, perhaps slightly undervalued at a 11.20% discount to what it is available for right now.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company.
For ETH, there are three important aspects you should further examine:
1. Financial Health: Does ETH 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 ETH’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 ETH? 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 does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock 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.
