A Look At The Intrinsic Value Of Vitreous Glass Inc. (CVE:VCI)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Vitreous Glass fair value estimate is CA$6.46

• Current share price of CA$5.80 suggests Vitreous Glass is potentially trading close to its fair value

• The average premium for Vitreous Glass' competitorsis currently 13%

Does the January share price for Vitreous Glass Inc. (CVE:VCI) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by taking the expected future cash flows and discounting them to today's value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Before you think you won't be able to understand it, just read on! It's actually much less complex than you'd imagine.

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

See our latest analysis for Vitreous Glass

The Calculation

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. To begin with, we have to get estimates of 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) forecast

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CA$, Millions)	CA$2.62m	CA$2.39m	CA$2.25m	CA$2.18m	CA$2.14m	CA$2.13m	CA$2.13m	CA$2.14m	CA$2.17m	CA$2.19m
Growth Rate Estimate Source	Est @ -13.44%	Est @ -8.83%	Est @ -5.60%	Est @ -3.34%	Est @ -1.76%	Est @ -0.65%	Est @ 0.12%	Est @ 0.66%	Est @ 1.04%	Est @ 1.31%
Present Value (CA$, Millions) Discounted @ 6.7%	CA$2.5	CA$2.1	CA$1.9	CA$1.7	CA$1.5	CA$1.4	CA$1.4	CA$1.3	CA$1.2	CA$1.1

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$16m

The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. The Gordon Growth formula is used to calculate Terminal Value at a future annual growth rate equal to the 5-year average of the 10-year government bond yield of 1.9%. We discount the terminal cash flows to today's value at a cost of equity of 6.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CA$2.2m× (1 + 1.9%) ÷ (6.7%– 1.9%) = CA$47m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CA$47m÷ ( 1 + 6.7%)¹⁰= CA$25m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CA$41m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of CA$5.8, the company appears about fair value at a 10% 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.

TSXV:VCI Discounted Cash Flow January 6th 2024

The Assumptions

We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual cash flows. You don't have to agree with these inputs, I recommend redoing the calculations yourself and playing with them. 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 Vitreous Glass 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 6.7%, which is based on a levered beta of 0.950. 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.

SWOT Analysis for Vitreous Glass

Strength

• Earnings growth over the past year exceeded its 5-year average.

• Currently debt free.

• Dividend is in the top 25% of dividend payers in the market.

Weakness

• Earnings growth over the past year underperformed the Basic Materials industry.

Opportunity

• Current share price is below our estimate of fair value.

• Lack of analyst coverage makes it difficult to determine VCI's earnings prospects.

Threat

• No apparent threats visible for VCI.

Looking Ahead:

Valuation is only one side of the coin in terms of building your investment thesis, and it ideally won't be the sole piece of analysis you scrutinize for a company. It's not possible to obtain a foolproof valuation with a DCF model. Preferably you'd apply different cases and assumptions and see how they would impact the company's valuation. For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Vitreous Glass, we've compiled three essential factors you should consider:

1. Risks: As an example, we've found 2 warning signs for Vitreous Glass that you need to consider before investing here.

2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!

3. Other Top Analyst Picks: Interested to see what the analysts are thinking? Take a look at our interactive list of analysts' top stock picks to find out what they feel might have an attractive future outlook!

PS. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSXV every day. If you want to find the calculation for other stocks just search here.

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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.