GMS' estimated fair value is US$136 based on 2 Stage Free Cash Flow to Equity
GMS' US$91.27 share price signals that it might be 33% undervalued
The US$93.00 analyst price target for GMS is 32% less than our estimate of fair value
How far off is GMS Inc. (NYSE:GMS) from its intrinsic value? Using the most recent financial data, we'll take a look at whether the stock is fairly priced by estimating the company's future cash flows and discounting them to their present value. One way to achieve this is by employing the Discounted Cash Flow (DCF) model. Don't get put off by the jargon, the math behind it is actually quite straightforward.
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
Is GMS Fairly Valued?
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) forecast
2025
2026
2027
2028
2029
2030
2031
2032
2033
2034
Levered FCF ($, Millions)
US$336.3m
US$340.2m
US$328.1m
US$322.5m
US$321.0m
US$322.4m
US$325.7m
US$330.6m
US$336.5m
US$343.2m
Growth Rate Estimate Source
Analyst x3
Analyst x3
Est @ -3.54%
Est @ -1.73%
Est @ -0.46%
Est @ 0.43%
Est @ 1.05%
Est @ 1.49%
Est @ 1.79%
Est @ 2.00%
Present Value ($, Millions) Discounted @ 7.8%
US$312
US$293
US$262
US$239
US$220
US$205
US$192
US$181
US$171
US$162
("Est" = FCF growth rate estimated by Simply Wall St) Present Value of 10-year Cash Flow (PVCF) = US$2.2b
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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%.
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$6.6b÷ ( 1 + 7.8%)10= US$3.1b
The total value is the sum of cash flows for the next ten years plus the discounted terminal value, which results in the Total Equity Value, which in this case is US$5.3b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of US$91.3, the company appears quite undervalued at a 33% 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.
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 GMS 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 7.8%, which is based on a levered beta of 1.294. 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 GMS
Strength
Debt is well covered by earnings and cashflows.
Balance sheet summary for GMS.
Weakness
Earnings declined over the past year.
Opportunity
Annual earnings are forecast to grow for the next 2 years.
Good value based on P/E ratio and estimated fair value.
Threat
Annual earnings are forecast to grow slower than the American market.
What else are analysts forecasting for GMS?
Looking Ahead:
Although the valuation of a company is important, it is only one of many factors that you need to assess 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. What is the reason for the share price sitting below the intrinsic value? For GMS, we've put together three further aspects you should look at:
Risks: Every company has them, and we've spotted 1 warning sign for GMS you should know about.
Future Earnings: How does GMS'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 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!
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.
主要見解
gms inc的估計公允價值爲136美元,基於兩階段的自由現金流向股東
gms inc的91.27美元股價表明它可能被低估了33%
gms inc的93.00美元的分析師價值目標比我們對公允價值的估計低32%
GMS Inc. (紐交所:GMS)離其內在價值有多遠?利用最近的財務數據,我們將通過估計公司的未來現金流量並將其貼現到其現值來判斷股票是否定價合理。實現這一目標的一種方法是使用貼現現金流(DCF)模型。不要被術語嚇到,其背後的數學實際上很簡單明瞭。
我們應該注意的是,估值的方法有很多種,就像DCF一樣,每種技術在特定的情況下都有其優點和缺點。對於那些熱愛股權分析的學習者來說,這裏的 Simply Wall St 分析模型可能是一些感興趣的內容。