Yahoo Finance Calculating The Intrinsic Value Of Where Food Comes From, Inc. (NASDAQ:WFCF)
Key Insights
Where Food Comes From's estimated fair value is US$14.25 based on 2 Stage Free Cash Flow to Equity
With US$11.48 share price, Where Food Comes From appears to be trading close to its estimated fair value
When compared to theindustry average discount to fair value of 17%, Where Food Comes From's competitors seem to be trading at a lesser discount
Today we'll do a simple run through of a valuation method used to estimate the attractiveness of Where Food Comes From, Inc. (NASDAQ:WFCF) as an investment opportunity by projecting its future cash flows and then discounting them to today's value. This will be done using the Discounted Cash Flow (DCF) model. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Check out our latest analysis for Where Food Comes From
Crunching The Numbers
We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF ($, Millions) | US$3.16m | US$3.12m | US$3.12m | US$3.14m | US$3.18m | US$3.23m | US$3.29m | US$3.36m | US$3.43m | US$3.51m |
Growth Rate Estimate Source | Est @ -2.82% | Est @ -1.23% | Est @ -0.11% | Est @ 0.67% | Est @ 1.22% | Est @ 1.61% | Est @ 1.87% | Est @ 2.06% | Est @ 2.19% | Est @ 2.29% |
Present Value ($, Millions) Discounted @ 6.2% | US$3.0 | US$2.8 | US$2.6 | US$2.5 | US$2.3 | US$2.2 | US$2.2 | US$2.1 | US$2.0 | US$1.9 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$24m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.5%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.2%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$3.5m× (1 + 2.5%) ÷ (6.2%– 2.5%) = US$97m
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$97m÷ ( 1 + 6.2%)10= US$53m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$76m. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$11.5, the company appears about fair value at a 19% discount to where the stock price trades currently. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Where Food Comes From as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 6.2%, which is based on a levered beta of 0.904. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Valuation is only one side of the coin in terms of building your investment thesis, and it is only one of many factors that you need to assess for a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Where Food Comes From, we've compiled three pertinent items you should explore:
Risks: As an example, we've found 1 warning sign for Where Food Comes From that you need to consider before investing here.
Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for WFCF's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
Other High Quality Alternatives: Do you like a good all-rounder? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!
PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the NASDAQCM every day. If you want to find the calculation for other stocks just search here.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
