Using the 2 Stage Free Cash Flow to Equity, Titan International fair value estimate is US$9.25
Current share price of US$8.33 suggests Titan International is potentially trading close to its fair value
Industry average discount to fair value of 3.7% suggests Titan International's peers are currently trading at a lower discount
Today we will run through one way of estimating the intrinsic value of Titan International, Inc. (NYSE:TWI) by taking the expected future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. There's really not all that much to it, even though it might appear quite complex.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
The Model
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To start off with, we need to estimate the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, so we discount the value of these future cash flows to their estimated value in today's dollars:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$77.5m
US$66.3m
US$60.1m
US$56.6m
US$54.7m
US$53.8m
US$53.5m
US$53.7m
US$54.3m
US$55.0m
Growth Rate Estimate Source
Analyst x1
Est @ -14.42%
Est @ -9.38%
Est @ -5.85%
Est @ -3.38%
Est @ -1.65%
Est @ -0.44%
Est @ 0.40%
Est @ 1.00%
Est @ 1.41%
Present Value ($, Millions) Discounted @ 9.8%
US$70.6
US$55.0
US$45.4
US$39.0
US$34.3
US$30.7
US$27.9
US$25.5
US$23.5
US$21.7
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$374m
After calculating the present value of future cash flows in the initial 10-year period, we need to calculate the Terminal Value, which accounts for all future cash flows beyond 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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 9.8%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$763m÷ ( 1 + 9.8%)10= US$301m
The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$674m. In the final step we divide the equity value by the number of shares outstanding. Compared to the current share price of US$8.3, the company appears about fair value at a 10.0% 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.
NYSE:TWI Discounted Cash Flow July 18th 2024
Important Assumptions
The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. 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 Titan International 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 9.8%, which is based on a levered beta of 1.605. 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 Titan International
Strength
Debt is well covered by earnings and cashflows.
Balance sheet summary for TWI.
Weakness
Earnings declined over the past year.
Shareholders have been diluted in the past year.
What are analysts forecasting for TWI?
Opportunity
Annual earnings are forecast to grow faster than the American market.
Good value based on P/E ratio and estimated fair value.
Threat
No apparent threats visible for TWI.
Looking Ahead:
Whilst important, the DCF calculation ideally won't be the sole piece of analysis you scrutinize for a company. DCF models are not the be-all and end-all of investment valuation. 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 Titan International, we've put together three additional items you should further research:
Risks: To that end, you should be aware of the 3 warning signs we've spotted with Titan International .
Future Earnings: How does TWI'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: Do you like a good all-rounder? 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 updates its DCF calculation for every American stock every day, so if you want to find the intrinsic value of any other stock just search here.
Have feedback on this article? Concerned about the content?Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com. 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com
