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INVESTING IDEAS - page 45

Discover and validate investing ideas with valuation models and charts.

Is There Still A Buying Opportunity With Evertec Inc (NYSE: EVTC)?

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With the stock up 35.9% over the last three months, investors may be tempted to sell their shares of Evertec Inc (NYSE: EVTC). In this article, I am going to calculate the fair value of Evertec by forecasting its future cash flows and discounting them back to today’s value. Value investors may find the results from my analysis surprising.


DCF Methodology

The basic philosophy behind a DCF analysis is that the intrinsic value of a company is equal to the future cash flows of that company, discounted back to present value. The general formula is provided below. The intrinsic value is considered the actual value or “true value” of an asset based on an individual’s underlying expectations and assumptions.

Discounted Cash Flow Formula

Cash flows into the firm in the form of revenue as the company sells its products and services, and cash flows out as it pays its cash operating expenses such as salaries or taxes (taxes are part of the definition for cash operating expenses for purposes of defining free cash flow, even though taxes aren’t generally considered a part of operating income). With the leftover cash, the firm will make short-term net investments in working capital (an example would be inventory and receivables) and longer-term investments in property, plant and equipment. The cash that remains is available to pay out to the firm’s investors: bondholders and common shareholders.

I will take you through my own expectations for Evertec as well as explain how I arrived at certain assumptions. The full analysis was completed on Sunday, May 6. An updated analysis using real-time data can be viewed in your web browser at finbox.io’s Evertec DCF analysis page. The steps involved in the valuation are:

1. Forecast Free Cash Flows
  • Create a revenue forecast
  • Forecast EBITDA profit margin
  • Calculate free cash flow
2. Select a discount rate
3. Estimate a terminal value
4. Calculate the equity value

Step 1: Forecast Free Cash Flows

The key assumptions that have the greatest impact on cash flow projections are typically related to growth, profit margin and investments in the business. The analysis starts at the top of the income statement by creating a forecast for revenue and then works its way down to net operating profit after tax (NOPAT), as shown below.

Revenue - Operating Expenses = EBIT - Taxes = NOPAT

NOPAT - Capital Expenditures - NWC Investment + D&A = Unlevered FCF

From NOPAT, deduct cash outflows like capital expenditures and investments in net working capital and add back non-cash expenses from the income statement such as depreciation and amortization to calculate the unlevered free cash flow forecast (shown above).

Create A Revenue Forecast

When available, the finbox.io’s pre-built models use analyst forecasts as the starting assumptions. To forecast revenue, analysts gather data about the company, its customers and the state of the industry. I typically review the analysts’ forecast and modify the growth rates based on historical performance, news and other insights gathered from competitors. Note that if a company only has a small number of analysts giving projections, the consensus forecast tends to not be as reliable as companies that have several analysts’ estimates. Another check for reliability is to analyze the range of estimates. If the range is really wide, it may be less accurate.

Evertec and its subsidiaries engage in transaction processing business serving financial institutions, merchants, corporations, and government agencies in Latin America and the Caribbean. Analysts covering the stock often compare the company to a peer group that includes Fidelity National Information Services, Inc. (NYSE: FIS), Total System Services, Inc.(NYSE: TSS), Vantiv, Inc. (NYSE: WP), and Black Knight Financial Services, Inc. (NYSE: BKI).

Evertec Revenue CAGR vs Peers Chartsource: Benchmarks: Forecasted 5yr Revenue CAGRs

The company’s 5-year revenue CAGR of 3.5% is below FIS (9.5%), TSS (22.4%), and WP (16.7%). The company’s projected 5-year revenue CAGR of 3.6% is above FIS (1.7%) and TSS (-0.4%) and below WP (5.5%) and BKI (7.2%).

As highlighted below, Evertec’s revenue growth has ranged from 0.9% to 4.6% over the last five fiscal years.

Evertec Revenue Growth Chart

Going forward, analysts forecast that Evertec’s total revenue will reach $486 million by fiscal year 2022 representing a five-year CAGR of 3.6%.

Evertec Selected Revenue Growth Assumptions

Forecast Evertec’s EBITDA Profit Margin

The next step is to forecast the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Note that EBITDA is a commonly used metric in valuation models because it provides a cleaner picture of overall profitability, especially when benchmarking against comparable companies. This is because it ignores non-operating costs that can be affected by certain items such as a company’s financing decisions or political jurisdictions. For more detail, see Evertec’s EBITDA definition.

EBITDA margin is calculated by dividing EBITDA by revenue. The higher the EBITDA margin, the smaller the firm’s operating expenses are in relation to its revenue, which may ultimately lead to higher profit. Lower operating expenses for a given level of revenue can be a sign of internal economies of scale.

The charts below compare Evertec’s LTM EBITDA margin to the same peer group. The company’s EBITDA margin of 38.2% is above its selected comparable public companies: FIS (31.8%), TSS (23.2%), WP (21.6%) and below only BKI (44.9%).

Evertec EBITDA Margin vs Peers Chart

Evertec’s EBITDA margin has ranged from 38.2% to 46.0% over the last five fiscal years.

Evertec Historical and Projected EBITDA Margin Chart

Wall Street analysts are forecasting that Evertec’s EBITDA margin will reach 45.7% by fiscal year 2022, representing an increase of 7.6% from its LTM EBITDA margin of 38.2%.

Evertec Selected EBITDA Margin Assumptions

Although I don’t specifically walk through my assumptions here, I then forecasted depreciation & amortization, capital expenditures and net working capital based on historical levels.

Calculate Free Cash Flow

With all required forecasts in place, the next step is to calculate projected free cash flow as shown below.

Evertec 's Five Year Projected Free Cash Flows


Step 2: Select Evertec’s Discount Rate

The next step is to select a discount rate to calculate the present value of the forecasted free cash flows. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate. Generally, a company’s assets are financed by either debt (debt is after tax in the formula) or equity. WACC is the average return expected by these capital providers, each weighted by respective usage. The WACC is the required return on the firm’s assets.

It’s important to note that the WACC is the appropriate discount rate to use because this analysis calculates the free cash flow available to Evertec’s bondholders and common shareholders. On the other hand, the cost of equity would be the appropriate discount rate if we were calculating cash flows available only to Evertec’s common shareholders (i.e., dividend discount model, equity DCF). This is commonly referred to as the difference between free cash flow to equity (FCFE) and free cash flow to the firm (FCFF). By using the WACC to discount FCFF, we are calculating total firm value. If we discounted FCFE at the required return on equity, we would end up with equity value of the firm. Equity value of the firm is simply total firm value minus the market value of debt.

I determined a reasonable WACC estimate for Evertec to be 10.0% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s Evertec WACC Model Page. The DCF model then does the heavy lifting of calculating the discount factors by applying the mid-year convention technique.


Step 3: Estimate Evertec’s Terminal Value

Since it is not reasonable to expect that Evertec will cease its operations at the end of the five-year forecast period, we must estimate the company’s continuing value, or terminal value. Terminal value is an important part of the DCF model because it accounts for the largest percentage of the calculated present value of the firm. If you were to exclude the terminal value, you would be excluding all the future cash flow past the horizon period. Using finbox.io, users can choose a five-year or 10-year horizon period to forecast future free cash flow.

The most generally accepted techniques to calculate a terminal value are by applying the Gordon growth approach, using an EBITDA exit multiple and using a revenue exit multiple. This analysis applies the Gordon growth formula:

Terminal Value Calculation Using The Gordon Growth Formula

As the formula suggests, we need to estimate a “perpetuity” growth rate at which we expect Evertec’s free cash flows to grow forever. Most analysts suggest that a reasonable rate is typically between the historical inflation rate of 2% to 3% and the historical GDP growth rate of 4% to 5%.

Evertec’s free cash flows are still growing at the end of the projection period, so I’ve selected a perpetuity growth rate of 2.0% (at the midpoint).

Evertec Selected Terminal Value Assumptions


Step 4: Calculate Evertec’s Equity Value

The enterprise value previously calculated is a measure of the company’s total value. An equity waterfall is a term often used by valuation firms, referring to the trickle-down process of computing a company’s equity value from its enterprise value. Note that in the event of a bankruptcy, debt holders will be paid in full before anything is distributed to common shareholders. Therefore, we must subtract debt and other financial obligations to determine a firm’s equity value. The general formula for calculating equity value is illustrated in the figure below.

Enterprise Value - Debt - Minority Interest & Other Liabilities - Preferred Equity - Pension + Cash & Equivalents = Total Equity Value

The model uses the formula shown above to calculate equity value and divides the result by the shares outstanding to compute intrinsic value per share as shown at the bottom of the figure below.

Evertec's Equity Value Calculation

The assumptions I used in the model imply an intrinsic value per share range of $14.57 to $19.80 for Evertec.

Evertec’s stock price currently trades at $20.98 as of Sunday, May 6, -17.6% above the midpoint value of $16.86.


Conclusion: Evertec Has Downside Potential

A DCF analysis can seem complex at first, but it’s worth adding to your investment analysis toolbox since it provides the clearest view of company value.

Evertec’s stock has made impressive gains over the last three months and investors may very well decide to sell their shares. However, the stock still appears to have further downside potential based on its future cash flow projections.

A DCF analysis is only one piece of the puzzle in terms of building your investment thesis, and it shouldn’t be the only analysis you use when researching a company. Finbox.io applies a number of pre-built valuation models to calculate a fair value for a given stock and uses consensus Wall Street estimates for the forecast when available. The company’s average fair value of $18.34 implies -12.6% downside and is calculated from 11 separate analyses as shown in the table below.

Evertec Inc Valuation Detail
Analysis Model Fair Value Upside (Downside)
10-yr DCF Revenue Exit $16.05 -23.5%
5-yr DCF Revenue Exit $15.16 -27.7%
Peer Revenue Multiples $14.46 -31.1%
10-yr DCF EBITDA Exit $25.34 20.8%
5-yr DCF EBITDA Exit $28.71 36.9%
Peer EBITDA Multiples $23.20 10.6%
10-yr DCF Growth Exit $17.22 -17.9%
5-yr DCF Growth Exit $16.86 -19.6%
Peer P/E Multiples $22.98 9.5%
Dividend Discount Model (multi-stage) $14.77 -29.6%
Earnings Power Value $7.00 -66.6%
Average $18.34 -12.6%

Note that an updated model using real-time data can be viewed in your web browser by clicking on any of the analyses listed above.

This is not a buy or sell recommendation on any security mentioned.

Should You Buy Cray Inc (NASDAQ: CRAY) Now?

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Shares of Cray Inc (NASDAQ: CRAY) are receiving a lot of investor interest as of late due to the stock’s 36.3% increase over the last month. Shareholders are now asking themselves whether the company’s current stock price is reflective of its true value or if shares have even further upside from here.

Let’s take a look at Cray’s value and outlook based on its most recent financial data to see if there are any catalysts for a price change.


What Is Cray Worth?

Cray appears to be overvalued by -23.4% at the moment, based on 4 separate valuation models. The stock is currently trading at $27.85 on the market compared to our average intrinsic value of $21.35. This means that the opportunity to buy Cray at a good price has disappeared.

Cray Inc Valuation Detail
Analysis Model Fair Value Upside (Downside)
10-yr DCF Revenue Exit $19.41 -30.3%
5-yr DCF Revenue Exit $26.04 -6.5%
Peer Revenue Multiples $24.72 -11.2%
5-yr DCF EBITDA Exit $15.22 -45.4%
Average $21.35 -23.4%

Click on any of the analyses above to view the latest model with real-time data.

However, will there be another opportunity to buy low in the future? Given that Cray’s stock is fairly volatile (i.e. its price movements are magnified relative to the rest of the market) could mean the price can sink lower, giving investors another chance to buy in the future. This is based on its beta of 1.97, which is a good indicator for share price volatility.


How Much Growth Will Cray Generate?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations.

Cray projected revenue chartsource: finbox.io data explorer

Cray’s revenue growth is expected to average 14.6% over the next five fiscal years, indicating a solid future ahead. Unless expenses grow at the same level, or higher, this top-line growth should lead to robust cash flows, feeding into a higher share value.


Next Steps

While many investors tend to categorize stocks as either value or growth plays, the most successful investors view growth in conjunction with a company’s value. Take legendary investor Peter Lynch for example, who is widely known for popularizing the term growth at a reasonable price (GARP).

GARP is a strategy that combines aspects of both growth and value investing techniques by finding high growth companies that don’t trade at overly high valuations. In the application of this strategy, Lynch achieved 29% annualized returns as the manager of Fidelity’s Magellan Fund from 1977 to 1990. Needless to say the importance of analyzing a company’s fair value in addition to its growth prospects.

Cray has positioned itself so that double-digit growth appears to be a reasonable assumption for the foreseeable future. However, this growth does not look highly attractive at current trading levels. As such, investors may want to hold off on buying or adding to their CRAY position for the time being.

However, if you have not done so already, I highly recommend you complete your research on Cray by taking a look at the following:

Efficiency Metrics: return on equity is used to measure the return that a firm generates on the book value of common equity. View Cray’s return on equity here.

Risk Metrics: what is Cray’s cash ratio which is used to assess a company’s short-term liquidity. View the company’s cash ratio here.

Valuation Metrics: what is Cray’s free cash flow yield and how does it compare to its publicly traded peers? This metric measures the amount of free cash flow for each dollar of equity (market capitalization). Analyze the free cash flow yield here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Should You Buy Phillips 66 (NYSE: PSX) at $111 Per Share?

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Phillips 66 (NYSE: PSX), an energy company with a market capitalization of $51.9 billion, saw its share price increase by 16.0% over the last month. As a large-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could shares still be trading at a relatively cheap price? Let’s take a look at Phillips 66’s outlook and value based on its most recent financial data to see if there are any catalysts for a price change.


Is Phillips 66 Still Cheap?

The stock seems fairly valued at the moment according to 4 separate valuation analyses. Shares are trading roughly 3% above its intrinsic value. This means if you were to buy Phillips 66 today, you’d be paying a reasonable price for it. If you believe that the stock is really worth $107.67, then there isn’t much room for the share price to appreciate beyond where it’s currently trading.

Phillips 66 Valuation Detail
Analysis Model Fair Value Upside (Downside)
Peer EBITDA Multiples $113.46 2.1%
Peer P/E Multiples $132.84 19.5%
Dividend Discount Model (multi-stage) $75.22 -32.3%
Earnings Power Value $109.15 -1.8%
Average $107.67 -3.2%

Click on any of the analyses above to view the latest model with real-time data.

In addition, it seems like Phillips 66’s share price is quite stable, which could mean there may be less chances to buy low in the future now that it’s fairly valued. This is because the stock is less volatile than the wider market given its beta of 0.82.


What Does The Future Of Phillips 66 Look Like?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations.

Phillips 66 projected revenue chartsource: finbox.io data explorer

Phillips 66’s revenue growth is expected to average 13.1% over the next five fiscal years, indicating a solid future ahead. Unless expenses grow at the same level, or higher, this top-line growth should lead to robust cash flows, feeding into a higher share value.


How This Impacts You

Many investors separate stocks into value and growth categories based on quantitative metrics. However, one of the most famous investors in the world views this as foolish. In Warren Buffett’s 1992 letter to Berkshire Hathaway shareholders, Buffett touches upon a subject at odds with much of the investment industry:

“Most analysts feel they must choose between two approaches customarily thought to be in opposition: ‘value’ and ‘growth.’ Indeed, many investment professionals see any mixing of the two terms as a form of intellectual cross-dressing. We view that as fuzzy thinking… In our opinion, the two approaches are joined at the hip: Growth is always a component in the calculation of value.”

While investors tend to categorize stocks into value and growth, some of the most successful investors view growth as simply one component of a company’s value.

Phillips 66’s optimistic future growth appears to have been factored into the current share price with the stock now trading near its intrinsic value. As a shareholder, you may have already conducted your fundamental analysis on the company and the stock’s recent appreciation may have been expected. Therefore, it may be time for investors to take some chips off the table. For prospective investors looking to purchase shares of Phillips 66, it may be worth holding off until the stock develops a wider margin of safety.

But before making an investment decision, I recommend you continue to research Phillips 66 to get a more comprehensive view of the company by looking at:

Risk Metrics: what is Phillips 66’s cash ratio which is used to assess a company’s short-term liquidity. View the company’s cash ratio here.

Valuation Metrics: what is Phillips 66’s free cash flow yield and how does it compare to its publicly traded peers? This metric measures the amount of free cash flow for each dollar of equity (market capitalization). Analyze the free cash flow yield here.

Efficiency Metrics: return on equity is used to measure the return that a firm generates on the book value of common equity. View Phillips 66’s return on equity here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

A Look At The Fair Value Of Tailored Brands Inc (NYSE: TLRD)

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With the stock up 170.4% over the last year, investors may be tempted to sell their shares of Tailored Brands Inc (NYSE: TLRD). In this article, I am going to calculate the fair value of Tailored by forecasting its future cash flows and discounting them back to today’s value. Value investors may find the results of my analysis surprising.


DCF Methodology

The basic philosophy behind a DCF analysis is that the intrinsic value of a company is equal to the future cash flows of that company, discounted back to present value. The general formula is provided below. The intrinsic value is considered the actual value or “true value” of an asset based on an individual’s underlying expectations and assumptions.

Discounted Cash Flow Formula

Cash flows into the firm in the form of revenue as the company sells its products and services, and cash flows out as it pays its cash operating expenses such as salaries or taxes (taxes are part of the definition for cash operating expenses for purposes of defining free cash flow, even though taxes aren’t generally considered a part of operating income). With the leftover cash, the firm will make short-term net investments in working capital (an example would be inventory and receivables) and longer-term investments in property, plant and equipment. The cash that remains is available to pay out to the firm’s investors: bondholders and common shareholders.

I will take you through my own expectations for Tailored as well as explain how I arrived at certain assumptions. The full analysis was completed on Monday, April 30. An updated analysis using real-time data can be viewed in your web browser at finbox.io’s Tailored DCF analysis page. The steps involved in the valuation are:

1. Forecast Free Cash Flows
  • Create a revenue forecast
  • Forecast EBITDA profit margin
  • Calculate free cash flow
2. Select a discount rate
3. Estimate a terminal value
4. Calculate the equity value

Step 1: Forecast Free Cash Flows

The key assumptions that have the greatest impact on cash flow projections are typically related to growth, profit margin and investments in the business. The analysis starts at the top of the income statement by creating a forecast for revenue and then works its way down to net operating profit after tax (NOPAT), as shown below.

Revenue - Operating Expenses = EBIT - Taxes = NOPAT

NOPAT - Capital Expenditures - NWC Investment + D&A = Unlevered FCF

From NOPAT, deduct cash outflows like capital expenditures and investments in net working capital and add back non-cash expenses from the income statement such as depreciation and amortization to calculate the unlevered free cash flow forecast (shown above).

Create A Revenue Forecast

When available, the finbox.io’s pre-built models use analyst forecasts as the starting assumptions. To forecast revenue, analysts gather data about the company, its customers and the state of the industry. I typically review the analysts’ forecast and modify the growth rates based on historical performance, news and other insights gathered from competitors. Note that if a company only has a small number of analysts giving projections, the consensus forecast tends to not be as reliable as companies that have several analysts’ estimates. Another check for reliability is to analyze the range of estimates. If the range is really wide, it may be less accurate.

Tailored Brands operates as a specialty apparel retailer in the United States, Puerto Rico, and Canada. The company operates in two segments, Retail and Corporate Apparel. The Retail segment offers suits, suit separates, sport coats, slacks, formalwear, business casual, denim, sportswear, outerwear, dress shirts, dress pants, ties, shoes, and accessories for men in classic, modern, and slim fits in various sizes. As of January 28, 2017, this segment operated 1,667 stores under the Men’s Wearhouse, Men’s Wearhouse and Tux, Jos. A. Bank, Joseph Abboud, Moores, K&G, and The Tuxedo Shop @ Macy’s brands; menswearhouse.comjosbank.com, and josephabboud.com Internet sites. Analysts covering the stock often compare the company to a peer group that includes DSW Inc. (NYSE: DSW), Coach, Inc. (NYSE: TPR), Chico’s FAS, Inc. (NYSE: CHS), and Under Armour, Inc. (NYSE: UAA).

Tailored Revenue CAGR vs Peers Chartsource: Benchmarks: Forecasted 5yr Revenue CAGRs

The company’s 5-year revenue CAGR of 7.2% is above its selected comparable public companies: DSW (6.0%), TPR (-1.2%), CHS (2.4%) and below UAA (22.1%). The company’s projected 5-year revenue CAGR of -0.7% is only above CHS (-1.3%) and below DSW (2.5%), TPR (9.2%) and UAA (8.0%).

As highlighted below, Tailored’s revenue growth has ranged from -3.4% to 31.5% over the last five fiscal years.

Tailored Revenue Growth Chart

Going forward, analysts forecast that Tailored’s total revenue will reach $3,268 million by fiscal year 2022 representing a five-year CAGR of -0.7%.

Tailored Selected Revenue Growth Assumptions

Forecast Tailored’s EBITDA Profit Margin

The next step is to forecast the company’s earnings before interest, taxes, depreciation and amortization (EBITDA). Note that EBITDA is a commonly used metric in valuation models because it provides a cleaner picture of overall profitability, especially when benchmarking against comparable companies. This is because it ignores non-operating costs that can be affected by certain items such as a company’s financing decisions or political jurisdictions. For more detail, see Tailored’s EBITDA definition.

EBITDA margin is calculated by dividing EBITDA by revenue. The higher the EBITDA margin, the smaller the firm’s operating expenses are in relation to its revenue, which may ultimately lead to higher profit. Lower operating expenses for a given level of revenue can be a sign of internal economies of scale.

The charts below compare Tailored’s LTM EBITDA margin to the same peer group. The company’s EBITDA margin of 10.8% is above its selected comparable public companies: DSW (8.1%), CHS (10.4%) and UAA (4.1%) and below TPR (17.4%).

Tailored EBITDA Margin vs Peers Chart

Tailored’s EBITDA margin has ranged from 7.0% to 12.5% over the last five fiscal years.

Tailored Historical and Projected EBITDA Margin Chart

Wall Street analysts are forecasting that Tailored’s EBITDA margin will reach 10.9% by fiscal year 2022, representing an increase of 0.1% from its LTM EBITDA margin of 10.8%.

Tailored Selected EBITDA Margin Assumptions

Although I don’t specifically walk through my assumptions here, I then forecasted depreciation & amortization, capital expenditures and net working capital based on historical levels.

Calculate Free Cash Flow

With all required forecasts in place, the next step is to calculate projected free cash flow as shown below.

Tailored 's Five Year Projected Free Cash Flows


Step 2: Select Tailored’s Discount Rate

The next step is to select a discount rate to calculate the present value of the forecasted free cash flows. I used finbox.io’s Weighted Average Cost of Capital (WACC) model to help arrive at an estimate. Generally, a company’s assets are financed by either debt (debt is after tax in the formula) or equity. WACC is the average return expected by these capital providers, each weighted by respective usage. The WACC is the required return on the firm’s assets.

It’s important to note that the WACC is the appropriate discount rate to use because this analysis calculates the free cash flow available to Tailored’s bondholders and common shareholders. On the other hand, the cost of equity would be the appropriate discount rate if we were calculating cash flows available only to Tailored’s common shareholders (i.e., dividend discount model, equity DCF). This is commonly referred to as the difference between free cash flow to equity (FCFE) and free cash flow to the firm (FCFF). By using the WACC to discount FCFF, we are calculating total firm value. If we discounted FCFE at the required return on equity, we would end up with equity value of the firm. Equity value of the firm is simply total firm value minus the market value of debt.

I determined a reasonable WACC estimate for Tailored to be 7.0% at the midpoint. An updated cost of capital analysis using real-time data can be found at finbox.io’s Tailored WACC Model Page. The DCF model then does the heavy lifting of calculating the discount factors by applying the mid-year convention technique.


Step 3: Estimate Tailored’s Terminal Value

Since it is not reasonable to expect that Tailored will cease its operations at the end of the five-year forecast period, we must estimate the company’s continuing value, or terminal value. Terminal value is an important part of the DCF model because it accounts for the largest percentage of the calculated present value of the firm. If you were to exclude the terminal value, you would be excluding all the future cash flow past the horizon period. Using finbox.io, users can choose a five-year or 10-year horizon period to forecast future free cash flow.

The most generally accepted techniques to calculate a terminal value are by applying the Gordon growth approach, using an EBITDA exit multiple and using a revenue exit multiple. This analysis applies the Gordon growth formula:

Terminal Value Calculation Using The Gordon Growth Formula

As the formula suggests, we need to estimate a “perpetuity” growth rate at which we expect Tailored’s free cash flows to grow forever. Most analysts suggest that a reasonable rate is typically between the historical inflation rate of 2% to 3% and the historical GDP growth rate of 4% to 5%.

Tailored Selected Terminal Value Assumptions


Step 4: Calculate Tailored’s Equity Value

The enterprise value previously calculated is a measure of the company’s total value. An equity waterfall is a term often used by valuation firms, referring to the trickle-down process of computing a company’s equity value from its enterprise value. Note that in the event of a bankruptcy, debt holders will be paid in full before anything is distributed to common shareholders. Therefore, we must subtract debt and other financial obligations to determine a firm’s equity value. The general formula for calculating equity value is illustrated in the figure below.

Enterprise Value - Debt - Minority Interest & Other Liabilities - Preferred Equity - Pension + Cash & Equivalents = Total Equity Value

The model uses the formula shown above to calculate equity value and divides the result by the shares outstanding to compute intrinsic value per share as shown at the bottom of the figure below.

Tailored's Equity Value Calculation

The assumptions I used in the model imply an intrinsic value per share range of $34.14 to $46.86 for Tailored.

Tailored’s stock price currently trades at $31.00 as of Monday, April 30, 20.5% below the midpoint value of $38.02.


Conclusion: Tailored Has Upside Potential

A DCF analysis can seem complex at first, but it’s worth adding to your investment analysis toolbox since it provides the clearest view of company value.

Tailored’s stock has made impressive gains over the last year and investors may very well decide to sell their shares. However, the stock still appears to have further upside potential based on its future cash flow projections.

A DCF analysis is only one piece of the puzzle in terms of building your investment thesis, and it shouldn’t be the only analysis you use when researching a company. Finbox.io applies a number of pre-built valuation models to calculate a fair value for a given stock and uses consensus Wall Street estimates for the forecast when available. The company’s average fair value of $34.02 implies 9.7% upside and is calculated from 8 separate analyses as shown in the table below.

Tailored Brands Inc Valuation Detail
Analysis Model Fair Value Upside (Downside)
10-yr DCF Revenue Exit $43.40 40.0%
5-yr DCF Revenue Exit $39.21 26.5%
Peer Revenue Multiples $28.57 -7.8%
Peer EBITDA Multiples $27.78 -10.4%
10-yr DCF Growth Exit $42.54 37.2%
5-yr DCF Growth Exit $38.02 22.6%
Peer P/E Multiples $29.90 -3.6%
Dividend Discount Model (multi-stage) $22.72 -26.7%
Average $34.02 9.7%

Note that an updated model using real-time data can be viewed in your web browser by clicking on any of the analyses listed above.

This is not a buy or sell recommendation on any security mentioned.

Where is Chipotle Mexican Grill, Inc.’s (NYSE: CMG) Stock Price Going From Here?

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Chipotle Mexican Grill, Inc. (NYSE: CMG) investors have enjoyed seeing the stock price increase by 31.0% over the last month. As a large-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Let’s take a look at the company’s expected growth and valuation based on its most recent financial data to see if there is further upside moving forward.


What’s The Opportunity In Chipotle?

According to our 10 valuation models, Chipotle seems to be fairly priced in the market at 9.5% above its intrinsic value. Meaning if you buy Chipotle today, you’d be paying a reasonable price for it. If you believe the company’s fair value is $382.91, then there’s not significant upside to be gained from mispricing.

Chipotle Mexican Grill, Inc. Valuation Detail
Analysis Model Fair Value Upside (Downside)
10-yr DCF Revenue Exit $420.02 -0.8%
5-yr DCF Revenue Exit $471.80 11.5%
Peer Revenue Multiples $603.87 42.7%
10-yr DCF EBITDA Exit $397.34 -6.1%
5-yr DCF EBITDA Exit $441.37 4.3%
Peer EBITDA Multiples $299.91 -29.1%
10-yr DCF Growth Exit $325.17 -23.2%
5-yr DCF Growth Exit $344.50 -18.6%
Peer P/E Multiples $251.90 -40.5%
Earnings Power Value $273.18 -35.5%
Average $382.91 -9.5%

Click on any of the analyses above to view the latest model with real-time data.

In addition, it seems like Chipotle’s share price is quite stable, which could mean there may be less chances to buy low in the future now that it’s fairly valued. This is because the stock is less volatile than the wider market given its beta of 0.49.


Can We Expect Growth From Chipotle?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Although value investors would argue that it’s the intrinsic value relative to the price that matters the most, a more compelling investment thesis would be high growth potential at a cheap price.

Chipotle projected ebitda chartsource: finbox.io data explorer

With EBITDA expected to grow on average of 15.9% over the next couple years, the future certainly appears bright for Chipotle. It looks like higher cash flows are in the cards for shareholders, which should feed into a higher share valuation.


What This Means For Investors

Growth investors typically look to invest in companies that are expanding sales, gaining market share and building customer bases. On the other hand, value investors often argue that the most successful investments are in companies that deliver the highest cash flows while trading at the lowest valuation.

But why not put those hands together? A company that has both growth and value characteristics would certainly make the most attractive investment. So what did we find out about Chipotle?

Chipotle’s optimistic future growth appears to have been factored into the current share price with the stock now trading near its intrinsic value. As a shareholder, you may have already conducted your fundamental analysis on the company and the stock’s recent appreciation may have been expected. Therefore, it may be time for investors to take some chips off the table. For prospective investors looking to purchase shares of Chipotle, it may be worth holding off until the stock develops a wider margin of safety.

It is important to note that there are a variety of other fundamental factors that I have not taken into consideration in this article. If you have not done so already, I highly recommend that you complete your research on Chipotle by taking a look at the following:

Valuation Metrics: what is Chipotle’s EBITDA less CapEx multiple and how does it compare to its peers? This is a helpful multiple to analyze when comparing capital intensive businesses. View the company’s EBITDA less CapEx multiple here.

Risk Metrics: what is Chipotle’s asset efficiency? This ratio measures the amount of cash flow that a company generates from its assets. View the company’s asset efficiency here.

Efficiency Metrics: is management becoming more or less efficient in creating value for the firm? Find out by analyzing the company’s return on invested capital ratio here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Have Investors Already Priced In CVR Refining LP’s (NYSE: CVRR) Growth?

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CVR Refining LP (NYSE: CVRR), an energy company with a market capitalization of $2.5 billion, saw its share price increase by 31.8% over the last month. As a mid-cap stock with decent coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could shares still be trading at a relatively cheap price? Let’s take a look at CVR Refining’s outlook and value based on its most recent financial data to see if there are any catalysts for a price change.


What Is CVR Refining Worth?

Welcoming news for investors, CVR Refining is still trading at a fairly cheap price. According to our 7 valuation analyses, the intrinsic value for the stock is $19.82 per share and is currently trading at $17.55 in the market. This means that there is still an opportunity to buy now.

CVR Refining LP Valuation Detail
Analysis Model Fair Value Upside (Downside)
10-yr DCF EBITDA Exit $23.66 34.8%
5-yr DCF EBITDA Exit $25.25 43.9%
Peer EBITDA Multiples $18.90 7.7%
10-yr DCF Growth Exit $20.62 17.5%
5-yr DCF Growth Exit $20.36 16.0%
Peer P/E Multiples $17.41 -0.8%
Earnings Power Value $12.51 -28.7%
Average $19.82 12.9%

Click on any of the analyses above to view the latest model with real-time data.

What’s more interesting is that CVR Refining’s share price is quite volatile, which gives us more chances to buy since the share price could sink lower (or rise higher) in the future. This is based on its high beta, which is a good indicator for how much the stock moves relative to the rest of the market.


How Much Growth Will CVR Refining Generate?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. Buying a great company with a robust outlook at a cheap price is always a good investment, so let’s also take a look at the company’s future expectations.

CVR Refining projected ebitda chartsource: finbox.io data explorer

With CVR Refining’s relatively muted EBITDA growth of 6.4% expected over the next five years on average, growth doesn’t seem like a key catalyst for a buying decision, at least in the short to medium-term.


Next Steps

While many investors tend to categorize stocks as either value or growth plays, the most successful investors view growth in conjunction with a company’s value. Take legendary investor Peter Lynch for example, who is widely known for popularizing the term growth at a reasonable price (GARP).

GARP is a strategy that combines aspects of both growth and value investing techniques by finding high growth companies that don’t trade at overly high valuations. In the application of this strategy, Lynch achieved 29% annualized returns as the manager of Fidelity’s Magellan Fund from 1977 to 1990. Needless to say the importance of analyzing a company’s fair value in addition to its growth prospects.

Although CVR Refining’s future growth is relatively low, the company’s stock still appears to be trading at a discount to its intrinsic value. Therefore, it may be a great time to purchase shares or add more to your existing holdings.

However, if you have not done so already, I highly recommend you complete your research on CVR Refining by taking a look at the following:

Efficiency Metrics: fixed asset turnover is calculated by dividing revenue by average fixed assets. View CVR Refining’s fixed asset turnover here.

Risk Metrics: how much interest coverage does CVR Refining have? This is a ratio used to assess a firm’s ability to pay interest expenses based on operating profits (EBIT). View the company’s interest coverage here.

Valuation Metrics: what is CVR Refining’s short ratio and how does it compare to its publicly traded peers? It represents the percentage of total shares outstanding that is being shorted. View the short ratio here.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

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