- Oil and Gas
A Look At The Intrinsic Value Of Parkland Corporation (TSE:PKI)
- The projected fair value for Parkland is CA$32.07 based on 2 Stage Free Cash Flow to Equity
- Current share price of CA$32.28 suggests Parkland is potentially trading close to its fair value
- The CA$39.40 analyst price target for PKI is 23% more than our estimate of fair value
Does the March share price for Parkland Corporation (TSE:PKI) reflect what it's really worth? Today, we will estimate the stock's intrinsic value by estimating the company's future cash flows and discounting them to their present value. This will be done using the Discounted Cash Flow (DCF) model. Believe it or not, it's not too difficult to follow, as you'll see from our example!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. If you want to learn more about discounted cash flow, the rationale behind this calculation can be read in detail in the Simply Wall St analysis model.
See our latest analysis for Parkland
Step By Step Through The Calculation
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. To begin with, we have to get estimates of the next ten years of cash flows. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
Generally we assume that a dollar today is more valuable than a dollar in the future, so we need to discount the sum of these future cash flows to arrive at a present value estimate:
10-year free cash flow (FCF) estimate
|Levered FCF (CA$, Millions)||CA$679.7m||CA$738.4m||CA$654.5m||CA$652.8m||CA$655.1m||CA$660.1m||CA$667.1m||CA$675.6m||CA$685.2m||CA$695.7m|
|Growth Rate Estimate Source||Analyst x7||Analyst x7||Analyst x1||Est @ -0.26%||Est @ 0.35%||Est @ 0.77%||Est @ 1.07%||Est @ 1.27%||Est @ 1.42%||Est @ 1.52%|
|Present Value (CA$, Millions) Discounted @ 13%||CA$603||CA$580||CA$456||CA$403||CA$359||CA$320||CA$287||CA$258||CA$232||CA$209|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CA$3.7b
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 1.8%. We discount the terminal cash flows to today's value at a cost of equity of 13%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = CA$696m× (1 + 1.8%) ÷ (13%– 1.8%) = CA$6.4b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= CA$6.4b÷ ( 1 + 13%)10= CA$1.9b
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 CA$5.6b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of CA$32.3, the company appears around fair value at the time of writing. The assumptions in any calculation have a big impact on the valuation, so it is better to view this as a rough estimate, not precise down to the last cent.
Now 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 Parkland 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 13%, which is based on a levered beta of 1.859. 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 Parkland
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by cash flow.
- Dividends are covered by earnings and cash flows.
- Interest payments on debt are not well covered.
- Dividend is low compared to the top 25% of dividend payers in the Oil and Gas market.
- Expensive based on P/E ratio and estimated fair value.
- Shareholders have been diluted in the past year.
- Annual earnings are forecast to grow faster than the Canadian market.
- Annual revenue is expected to decline over the next 3 years.
Although the valuation of a company is important, it 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. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Parkland, there are three essential items you should explore:
- Risks: Every company has them, and we've spotted 4 warning signs for Parkland (of which 1 is significant!) you should know about.
- Management:Have insiders been ramping up their shares to take advantage of the market's sentiment for PKI's future outlook? Check out our management and board analysis with insights on CEO compensation and governance factors.
- 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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the TSX every day. If you want to find the calculation for other stocks just search here.
Valuation is complex, but we're helping make it simple.
Find out whether Parkland is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Parkland Corporation operates food and convenience stores in Canada, the United States, and internationally.
Established dividend payer with proven track record.