Today I will be providing a simple run-through of the discounted cash flows (DCF) method to estimate the attractiveness of Rush Enterprises Inc (NASDAQ:RUSH.B) as an investment opportunity. 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 December 2017 so be sure check the latest calculation for Rush Enterprises here.
What’s the value?
I will be using the 2-stage growth model, which simply means we take in account two stages of company’s growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have perpetual stable growth rate. Firstly, I took the analyst consensus forecast of RUSH.B’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 9.79%. 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 $483.6M. Want to know how I calculated this value? Check out our detailed analysis here.
The infographic above illustrates how RUSH.B’s top and bottom lines are expected to move going forward, which should give you an idea of RUSH.B’s outlook. Next, I determine 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 stable 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 $1,350.0M.
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 $1,833.6M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of $46.03, which, compared to the current share price of $46.4, we see that Rush Enterprises is fair value, maybe slightly overvalued and not available at a discount at this time.
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 RUSH.B, I’ve put together three relevant factors you should further research:
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.