Is There An Opportunity With TFI International Inc’s (TSX:TFII) 26.28% Undervaluation?
I am going to run you through how I calculated the intrinsic value of TFI International Inc (TSX:TFII) 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 November 2017 so be sure check the latest calculation for TFI International here.
What’s the value?
We are going to use a two-stage DCF 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. To begin, I pulled together the analyst consensus estimates of TFII’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 11.87%. This resulted in a present value of 5-year cash flow of CA$1,297M. Want to know how I calculated this value? Take a look at our detailed analysis here.
The infographic above illustrates how TFII’s top and bottom lines are expected to move going forward, which should give you an idea of TFII’s outlook. Next, I calculate the terminal value, which accounts for all the future cash flows after the five years. 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. After discounting the terminal value back five years, the present value becomes CA$2,501M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CA$3,799M. In the final step we divide the equity value by the number of shares outstanding. This results in an intrinsic value of CA$42.24, which, compared to the current share price of CA$31.14, we see that TFI International is about right, perhaps slightly undervalued at a 26.28% 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. What is the reason for the share price to differ from the intrinsic value? For TFII, I’ve put together three fundamental aspects you should look at:
PS. The Simply Wall St app conducts a discounted cash flow for every stock on the TSX 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.
