A Look At The Intrinsic Value Of James Fisher and Sons plc (LON:FSJ)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, James Fisher and Sons fair value estimate is UK£3.01
• Current share price of UK£3.05 suggests James Fisher and Sons is potentially trading close to its fair value
• Our fair value estimate is 37% lower than James Fisher and Sons' analyst price target of UK£4.80

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of James Fisher and Sons plc (LON:FSJ) as an investment opportunity by taking the forecast future cash flows of the company and discounting them back to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. Models like these may appear beyond the comprehension of a lay person, but they're fairly easy to follow.

Remember though, that there are many ways to estimate a company's value, and a DCF is just one method. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

Check out our latest analysis for James Fisher and Sons

The Model

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 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.

Generally we assume that a dollar today is more valuable than a dollar in the future, 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

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (£, Millions)	UK£23.1m	UK£20.9m	UK£19.7m	UK£19.0m	UK£18.6m	UK£18.4m	UK£18.3m	UK£18.4m	UK£18.5m	UK£18.7m
Growth Rate Estimate Source	Analyst x2	Analyst x2	Est @ -5.85%	Est @ -3.64%	Est @ -2.09%	Est @ -1.01%	Est @ -0.25%	Est @ 0.28%	Est @ 0.65%	Est @ 0.91%
Present Value (£, Millions) Discounted @ 13%	UK£20.3	UK£16.3	UK£13.5	UK£11.5	UK£9.9	UK£8.7	UK£7.6	UK£6.8	UK£6.0	UK£5.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£106m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. 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 1.5%. We discount the terminal cash flows to today's value at a cost of equity of 13%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = UK£19m× (1 + 1.5%) ÷ (13%– 1.5%) = UK£160m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£160m÷ ( 1 + 13%)¹⁰= UK£46m

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£152m. The last step is to then divide the equity value by the number of shares outstanding. Compared to the current share price of UK£3.1, the company appears around fair value at the time of writing. Remember though, that this is just an approximate valuation, and like any complex formula - garbage in, garbage out.

Important Assumptions

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 James Fisher and Sons 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 2.000. 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 James Fisher and Sons

Next Steps:

Whilst important, the DCF calculation is only one of many factors that you need to assess for 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 James Fisher and Sons, we've compiled three pertinent aspects you should assess:

1. Risks: As an example, we've found 2 warning signs for James Fisher and Sons (1 is a bit unpleasant!) that you need to consider before investing here.
2. Future Earnings: How does FSJ'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.
3. 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 LSE every day. If you want to find the calculation for other stocks just search here.

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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.