I am going to run you through how I calculated the intrinsic value of Innophos Holdings Inc (NASDAQ:IPHS) using the discounted cash flow (DCF) method. 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. Also note that this article was written in February 2018 so be sure check the latest calculation for Innophos Holdings here.
What’s the value?
I use what is known as the 2-stage 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. Firstly, I took the analyst consensus forecast of IPHS’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 9.51%. When estimates weren’t available, I’ve extrapolated the average annual growth rate over the previous five years, capped at a reasonable level. This resulted in a present value of 5-year cash flow of $284.1M. Keen to know how I calculated this value? Read our detailed analysis here.
The graph above shows how IPHS’s top and bottom lines are expected to move going forward, which should give you some color on IPHS’s outlook. Now we need to 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 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 $622.2M.
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 $906.3M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of $46.52, which, compared to the current share price of $42.67, we see that Innophos Holdings is about right, perhaps slightly undervalued at a 8.28% discount to what it is available for right now.
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 IPHS, there are three fundamental aspects you should further research:
- 1. Financial Health: Does IPHS 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 IPHS’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 IPHS? 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.