Monthly Archives: December 2015

Valuation

Value a Stock in 4 Easy Steps

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Determining what a stock is worth does not have to be a complicated process if you have the right tools to help you.  There are 4 steps to generating a valuation using the Stockcalc website. www.stockcalc.com

In the last blog we outlined the process involved
https://www.stockcalc.com/blog/BrianD/2015/12/21/how-to-calculate-what-a-stock-is-worth/

In this we will dig a little more into the 4 steps:  I am using the Stockcalc website to do these calculations and for full disclose am company President.

The 4 Steps (once you have selected a company)
1)  Determine what the cost is for the funds needed to run and grow the business. We call this the Weighted Average Cost of Capital or WACC.   Large, stable companies have a lower WACC than more speculative companies.
2) Forecast the company’s financials into the future based on assumptions you have or are able to get from Analysts that cover the company. We have a number of forecasting tools on the site starting with Analyst forecasts and Growth projections all the way to using a blank page and creating the forecast yourself.
3) Value the company using Valuation models such as a Discounted Cash Flow (DCF) where you include the financial forecasts, WACC and other calculations and assumptions such as Capital Expenditures needed and Debt levels.  The site has a full DCF framework for you to calculate with and auto-populates each cell to get you started.
4) Test your assumptions, see how sensitive the company is to the inputs.  Testing your assumptions is a critical part of valuation work. When you get a different valuation than you see a company is trading for on the stock exchange you need to ask why, and test. You may have uncovered an opportunity.

Here is a valuation I recently did for Lowes Companies Inc. using this 4 step process.
https://www.stockcalc.com/blog/BrianD/2015/12/21/lowes-companies-inc-low-fundamental-valuation-using-analyst-forecast-data/

And here is the process explained on Video for Alphabet (GOOG)
https://www.youtube.com/watch?v=V5194KeW_d0

Valuation is part art, part science.  The assumptions you make impact the company’s value.  For example, if you think the WACC is 8% instead of 9% the company will calculate to be more valuable because its cost to service its capital will be lower.

Here is a tool you can use for free to quickly test your assumptions :
www.stockcalc.com/dcf.aspx
Simply load a symbol or name into the Symbol text box and select the company from the dropdown.  Test the valuation by changing the growth rates, WACC, Free Cash Flows etc.

Next Steps:
If you are not sure where to begin you can select a company you are familiar with (GOOG, AAPL) and work though the steps above on the Stockcalc site.   Each of these steps are found on the Research Page which you can access either by clicking the Research Button   or selecting Research from the dropdown menu next to the Stockcalc logo (both are on the Dashboard)

About Stockcalc:
If you would like to explore the Stockcalc website and quickly run valuations like  simply create an account at www.stockcalc.com  (Start with a 14 day free trial)  Use the walk-throughs (click the walking man icon), videos (video icon on each page) or the help menu to help navigate the site. The site has a number of tools for data query, backtesting,  forecasting and valuation.  We have a no restrictions  Stockcalc 14 Day Free Trial available as well.
If you would like the above valuation to test simply send us a note from Stockcalc’s “Contact Us” on the dashboard.

 

 

Uncategorised, Valuation

Lowes Companies Inc. (LOW) Fundamental Valuation using Analyst Forecast Data

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I used the Stockcalc website (www.stockcalc.com) to run a fundamental analysis for Lowes Companies (LOW:NYS)

Process:
I ran a Weighted Average Cost of Capital with the WACC Tool
I loaded the Analyst Estimate Data and used it to generate an Income Statement Forecast for 2016 to 2018
I then ran a Discounted Cash Flow with that Data.

The following screens show the steps:

Calculation of WACC for LOW:NYS

Lowes Companies WACC
The weighted average cost of capital for Lowes Companies (LOW:NYS)

This resulted in a WACC value of 8.78 for Lowes Companies Inc.

Next I loaded the Analyst Estimate Data and used it to generate an Income Statement Forecast for 2016 to 2018

LOW Analyst Estimates
Average Analyst Estimates for Lowes Companies Inc. (LOW:NYS)

 

LOW:NYS Income Statement
Income Statement Forecast for Lowes Companies Inc. (LOW:NYS)

 

I then loaded a Discounted Cash Flow using the above inputs

LOW:NYS DCF
Discounted Cash Flow Analysis for Lowes Companies (LOW:NYS)

Note – Stockcalc provides default or historic values to generate the initial valuation calculation- the user can then adjust based on their expectations:

Adjustments:
The cash flow values were taken directly from the Analyst estimates.  I reviewed the historic Capex figures and adjusted the ongoing Capital Expenditures to 0.9 billion from an average of 1.2 billion last 5 years based predominately on the last 2 years figures of 0.9 and 0.8 billion.  I also adjusted the terminal growth rate from the default of 3.0 to 3.4 given the Analyst projection for the next 3 years are 11% growth in EBITDA. These 2 adjustments resulted in a value of $74 per share.  I am not aware if there are redundant assets that would add to  company value.

The Analyst Mean Target Price for 2017 is $80.86.  This can be seen on the Average Analyst Estimates above.  To achieve that value I would need to increase the terminal value to 4.0 % per year in the discounted cash flow model.

Company Information:
Lowe’s Companies Inc. was incorporated in North Carolina in 1952 and has been publicly held since 1961. It is a Fortune(r) 100 company and a home improvement retailer. As of January 31, 2014, Lowe’s operated 1,832 home improvement and hardware stores in the United States, Canada and Mexico representing approximately 200 million square feet of retail selling space. The Company serves homeowners, renters and commercial business customers (Pro customer).

About Stockcalc:
If you would like to explore the Stockcalc website and quickly run valuations like  simply create an account at www.stockcalc.com .  Use the walk-throughs (click the walking man icon), videos (video icon on each page) or the help menu to help navigate the site. The site has a number of tools for data query, backtesting, forecasting and valuation.  We have a no restrictions 14 day free trial available. If you would like the above valuation to test simply send us a note from Stockcalc’s “Contact Us” on the dashboard.

 

 

 

 

Uncategorised, Valuation

How sensitive are companies to rising interest rates?

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The talk of will they or won’t they raise rates has been ongoing for more than 2 years now.  We have to expect either rates get raised at some point, we stumble along on the current path or we end up in deflationary times.  I want to explore the more optimistic of these scenarios and its impact on stock valuations: the economy improves and rates start to rise.

To look at this in detail I am using www.stockcalc.com  (Disclaimer: I am the President of Patchell Brook Equity Analytics and we created Stockcalc.com precisely for this type of analysis and valuation)

I will examine Caterpillar as it has with a 59/41 Equity to Debt in the Capital Structure

Using Stockcalc I first create and save a WACC for CAT:  (Research Menu, Valuation, WACC).  Stockcalc does a first pass on WACC using default values which results in a WACC of 8.93.

Cost of Equity (Ke) 13.63 (Using CAPM), After Tax cost of Debt : 2.17, 59% Equity, 41% Debt

 

WACC for CAT

Next I load the Quick DCF tool  so I can run the analysis (Research, Forecast, Analyst) (Note – the quick DCF is a testing and teaching tool, the other tools are more detailed in their analysis)

It is available for free at www.stockcalc.com/dcf.aspx or inside the Stockcalc.Com website

Quick DCF for CAT

Value Per Share ($) Calculations for Caterpillar (CAT:NYS) using the Quick DCF tool on Stockcalc.com

Each change in WACC (8.93 – 9.34 – 9.75) implies a 1 % change in Cost of Debt.  Growth rates are next 3 years and thereafter (5% and 3% in the first row for ex)

WACC 8.93 9.34 9.75
Growth rates 5,3% 70.02 61.28 53.60
Growth rates 6,4% 97.40 84.92 74.21
Growth rates 4,2% 50.55 44.08 38.30

(Current Price at the time of valuation (October 2015) was $69.34)

A 1% change in the Cost of Debt results in a 12.5% change in value per share.  A 1% change in Growth rates results in a 28% change in Value per Share.  A 1% change in WACC results in a similar 28% change in Value per Share.

Message: if interest rates are rising, growth prospects need to be rising at half the rate to keep this share price holding steady.

 

If you want to explore the Stockcalc software simply create an account at www.stockcalc.com and have a look around.  Use the walk-throughs (click the walking man icon), videos (video icon on each page) and  help menu to understand and navigate the site.  The site contains a number of tools including screens, queries, backtests, forecasts and a variety of valuation methods.