James Fisher and Sons plc (LON:FSJ) Shares Could Be 50% Below Their Intrinsic Value Estimate

Key Insights

• The projected fair value for James Fisher and Sons is UK£7.57 based on 2 Stage Free Cash Flow to Equity
• James Fisher and Sons' UK£3.80 share price signals that it might be 50% undervalued
• Analyst price target for FSJ is UK£5.80 which is 23% below our fair value estimate

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 expected future cash flows and discounting them to their present value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. For those who are keen learners of equity analysis, the Simply Wall St analysis model here may be something of interest to you.

See our latest analysis for James Fisher and Sons

What's The Estimated Valuation?

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. 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

	2023	2024	2025	2026	2027	2028	2029	2030	2031	2032
Levered FCF (£, Millions)	UK£22.6m	UK£27.4m	UK£30.9m	UK£33.7m	UK£36.0m	UK£37.9m	UK£39.3m	UK£40.6m	UK£41.6m	UK£42.4m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ 12.68%	Est @ 9.22%	Est @ 6.80%	Est @ 5.11%	Est @ 3.92%	Est @ 3.09%	Est @ 2.51%	Est @ 2.10%
Present Value (£, Millions) Discounted @ 10%	UK£20.5	UK£22.5	UK£23.0	UK£22.8	UK£22.1	UK£21.1	UK£19.9	UK£18.6	UK£17.3	UK£16.0

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = UK£204m

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. 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 10%.

Terminal Value (TV)= FCF₂₀₃₂ × (1 + g) ÷ (r – g) = UK£42m× (1 + 1.2%) ÷ (10%– 1.2%) = UK£471m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= UK£471m÷ ( 1 + 10%)¹⁰= UK£178m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is UK£381m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of UK£3.8, the company appears quite good value at a 50% 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.

The 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 10%, which is based on a levered beta of 1.307. 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.

Moving On:

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. It's not possible to obtain a foolproof valuation with a DCF model. 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. What is the reason for the share price sitting below the intrinsic value? For James Fisher and Sons, we've compiled three fundamental factors you should look at:

1. Risks: As an example, we've found 1 warning sign for James Fisher and Sons 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. Simply Wall St updates its DCF calculation for every British 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.