- United Kingdom
A Look At The Fair Value Of Cranswick plc (LON:CWK)
- The projected fair value for Cranswick is UK£36.11 based on 2 Stage Free Cash Flow to Equity
- Current share price of UK£29.44 suggests Cranswick is potentially trading close to its fair value
- The UK£38.29 analyst price target for CWK is 6.0% more than our estimate of fair value
Today we will run through one way of estimating the intrinsic value of Cranswick plc (LON:CWK) by taking the forecast future cash flows of the company and discounting them back to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Don't get put off by the jargon, the math behind it is actually quite straightforward.
Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.
View our latest analysis for Cranswick
Is Cranswick Fairly Valued?
We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second 'steady growth' period. 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.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
|Levered FCF (£, Millions)||UK£64.0m||UK£82.3m||UK£93.9m||UK£102.2m||UK£108.9m||UK£114.2m||UK£118.5m||UK£122.1m||UK£125.1m||UK£127.6m|
|Growth Rate Estimate Source||Analyst x6||Analyst x6||Analyst x6||Est @ 8.83%||Est @ 6.52%||Est @ 4.91%||Est @ 3.78%||Est @ 2.99%||Est @ 2.44%||Est @ 2.05%|
|Present Value (£, Millions) Discounted @ 6.7%||UK£59.9||UK£72.3||UK£77.3||UK£78.8||UK£78.6||UK£77.3||UK£75.2||UK£72.5||UK£69.6||UK£66.6|
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£728m
The second stage is also known as Terminal Value, this is the business's cash flow after the first stage. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (1.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 6.7%.
Terminal Value (TV)= FCF2032 × (1 + g) ÷ (r – g) = UK£128m× (1 + 1.2%) ÷ (6.7%– 1.2%) = UK£2.3b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= UK£2.3b÷ ( 1 + 6.7%)10= UK£1.2b
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 UK£1.9b. In the final step we divide the equity value by the number of shares outstanding. Relative to the current share price of UK£29.4, the company appears about fair value at a 18% discount to where the stock price trades currently. 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.
We would point out that the most important inputs to a discounted cash flow are the discount rate and of course the actual 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 Cranswick 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 6.7%, which is based on a levered beta of 0.800. 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 Cranswick
- Debt is not viewed as a risk.
- Earnings growth over the past year underperformed the Food industry.
- Dividend is low compared to the top 25% of dividend payers in the Food market.
- Annual earnings are forecast to grow for the next 3 years.
- Current share price is below our estimate of fair value.
- Dividends are not covered by cash flow.
- Annual earnings are forecast to grow slower than the British market.
Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn't be the only metric you look at when researching a company. DCF models are not the be-all and end-all of investment valuation. Instead the best use for a DCF model is to test certain assumptions and theories to see if they would lead to the company being undervalued or overvalued. For instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Cranswick, we've put together three additional aspects you should further research:
- Risks: For instance, we've identified 1 warning sign for Cranswick that you should be aware of.
- Future Earnings: How does CWK'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. The Simply Wall St app conducts a discounted cash flow valuation for every stock on the LSE 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 Cranswick 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.
Cranswick plc manufactures and supplies food products to grocery retailers, food service sector, and other food producers in the United Kingdom, Continental Europe, and internationally.
Excellent balance sheet, good value and pays a dividend.