Stock Analysis

Is Broadwind, Inc. (NASDAQ:BWEN) Trading At A 39% Discount?

NasdaqCM:BWEN
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Key Insights

  • The projected fair value for Broadwind is US$6.48 based on 2 Stage Free Cash Flow to Equity
  • Broadwind is estimated to be 39% undervalued based on current share price of US$3.94
  • The US$6.00 analyst price target for BWEN is 7.4% less than our estimate of fair value

In this article we are going to estimate the intrinsic value of Broadwind, Inc. (NASDAQ:BWEN) by taking the expected future cash flows and discounting them to today's value. We will use the Discounted Cash Flow (DCF) model on this occasion. 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. 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.

Check out our latest analysis for Broadwind

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. 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 need to discount the sum of these future cash flows to arrive at a present value estimate:

10-year free cash flow (FCF) estimate

2024 2025 2026 2027 2028 2029 2030 2031 2032 2033
Levered FCF ($, Millions) US$2.70m US$5.65m US$6.93m US$8.07m US$9.07m US$9.91m US$10.6m US$11.2m US$11.8m US$12.3m
Growth Rate Estimate Source Analyst x2 Analyst x2 Est @ 22.62% Est @ 16.55% Est @ 12.30% Est @ 9.32% Est @ 7.24% Est @ 5.78% Est @ 4.76% Est @ 4.05%
Present Value ($, Millions) Discounted @ 8.6% US$2.5 US$4.8 US$5.4 US$5.8 US$6.0 US$6.0 US$5.9 US$5.8 US$5.6 US$5.3

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$53m

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 (2.4%) 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 8.6%.

Terminal Value (TV)= FCF2033 × (1 + g) ÷ (r – g) = US$12m× (1 + 2.4%) ÷ (8.6%– 2.4%) = US$200m

Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$200m÷ ( 1 + 8.6%)10= US$87m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is US$141m. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Relative to the current share price of US$3.9, the company appears quite undervalued at a 39% 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.

dcf
NasdaqCM:BWEN Discounted Cash Flow May 21st 2024

The Assumptions

Now 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 Broadwind 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 8.6%, which is based on a levered beta of 1.363. 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 Broadwind

Strength
  • Debt is not viewed as a risk.
Weakness
  • Shareholders have been diluted in 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.

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 Broadwind, we've put together three fundamental items you should further examine:

  1. Risks: Every company has them, and we've spotted 3 warning signs for Broadwind you should know about.
  2. Future Earnings: How does BWEN'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 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.

Valuation is complex, but we're helping make it simple.

Find out whether Broadwind 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.

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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.