I am going to run you through how I calculated the intrinsic value of Zumiez Inc (NASDAQ:ZUMZ) 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. If you are reading this after April 2018 then I highly recommend you check out the latest calculation for Zumiez here.
Is ZUMZ 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. To start off, I use the analyst consensus estimates of ZUMZ’s levered free cash flow (FCF) over the next five years and discounted these values at the rate of 8.49%. 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 US$192.77M. Keen to know how I calculated this value? Read our detailed analysis here.
In the visual above, we see how how ZUMZ’s earnings are expected to move in the future, which should give you some color on ZUMZ’s outlook. Next, I determine the terminal value, which accounts for all the future cash flows after the five years. It’s appropriate 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. After discounting the terminal value back five years, the present value becomes US$735.06M.
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 US$927.83M. The last step is to then divide the equity value by the number of shares outstanding. This results in an intrinsic value of $36.75, which, compared to the current share price of $25.3, we see that Zumiez is quite undervalued at a 31.15% discount to what it is available for right now.
Whilst important, DCF calculation 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 ZUMZ, I’ve compiled three fundamental factors you should look at:
- Financial Health: Does ZUMZ 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.
- Future Earnings: How does ZUMZ’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.
- Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of ZUMZ? 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.