Yahoo Finance Investors Are Undervaluing K-Bro Linen Inc (TSE:KBL) By 40%
How far off is K-Bro Linen Inc (TSX:KBL) from its intrinsic value? Using the most recent financial data, I am going to take a look at whether the stock is fairly priced using the discounted cash flows (DCF) model. 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 June 2018 then I highly recommend you check out the latest calculation for K-Bro Linen here.
Crunching the numbers
I’ve used 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. To start off, I use the analyst consensus forecast of KBL’s levered free cash flow (FCF) over the next five years and discounted these values at the cost of equity of 8.47%. 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 CA$117.57M. Want to understand how I arrived at this number? Check out our detailed analysis here.
Above is a visual representation of how KBL’s top and bottom lines are expected to move in the future, which should give you some color on KBL’s outlook. Now we need to calculate 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 steady 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$505.37M.
The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is CA$622.94M. To get the intrinsic value per share, we divide this by the total number of shares outstanding. This results in an intrinsic value of CA$59.65, which, compared to the current share price of CA$35.93, we see that K-Bro Linen is quite undervalued at a 39.77% discount to what it is available for right now.
Next Steps:
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 KBL, there are three important factors you should look at:
Financial Health: Does KBL 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 KBL’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 KBL? 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 CA 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.
