Yahoo Finance Estimating The Intrinsic Value Of Xcerra Corporation (NASDAQ:XCRA)
How far off is Xcerra Corporation (NASDAQ:XCRA) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced by estimating the company’s future cash flows and discounting them to their present value. This is done using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model. Please also note that this article was written in June 2018 so be sure check out the updated calculation by following the link below. Check out our latest analysis for Xcerra
The method
I’m 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. In the first stage we need to estimate the cash flows to the business over the next five years. Seeing as no analyst estimates of free cash flow are available I have extrapolated the most recent reported free cash flow (FCF) based on the average annual revenue growth over the past five years. I then discount the sum of these cash flows to arrive at a present value estimate.
5-year cash flow estimate
2018 | 2019 | 2020 | 2021 | 2022 | |
Levered FCF ($, Millions) | $36.76 | $42.09 | $48.19 | $55.17 | $63.16 |
Source | Extrapolated @ (14.49%) | Extrapolated @ (14.49%) | Extrapolated @ (14.49%) | Extrapolated @ (14.49%) | Extrapolated @ (14.49%) |
Present Value Discounted @ 9.92% | $33.45 | $34.84 | $36.29 | $37.80 | $39.37 |
Present Value of 5-year Cash Flow (PVCF)= US$181.74m
We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. The Gordon Growth formula is used to calculate Terminal Value at an annual growth rate equal to the 10-year government bond rate of 2.9%. We discount this to today’s value at a cost of equity of 9.9%.
Terminal Value (TV) = FCF2022 × (1 + g) ÷ (r – g) = US$63.16m × (1 + 2.9%) ÷ (9.9% – 2.9%) = US$933.31m
Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$933.31m ÷ ( 1 + 9.9%)5 = US$581.69m
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$763.42m. The last step is to then divide the equity value by the number of shares outstanding. If the stock is an depositary receipt (represents a specified number of shares in a foreign corporation) then we use the equivalent number. This results in an intrinsic value of $13.9. Relative to the current share price of $13.87, the stock is about right, perhaps slightly undervalued at a 0.23% discount to what it is available for right now.
The assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at Xcerra as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 9.9%, which is based on a levered beta of 0.988. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.
Next Steps:
Although the valuation of a company is important, it shouldn’t be the only metric you look at when researching a company.
For XCRA, I’ve put together three important aspects you should further examine:
Financial Health: Does XCRA 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 XCRA’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 XCRA? 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 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.
