Key Insights
- Using the 2 Stage Free Cash Flow to Equity, Hayward Holdings fair value estimate is US$13.78
- With US$14.41 share price, Hayward Holdings appears to be trading close to its estimated fair value
- The US$15.63 analyst price target for HAYW is 13% more than our estimate of fair value
In this article we are going to estimate the intrinsic value of Hayward Holdings, Inc. (NYSE:HAYW) by taking the expected future cash flows and discounting them to today's value. Our analysis will employ the Discounted Cash Flow (DCF) model. It may sound complicated, but actually it is quite simple!
We would caution that there are many ways of valuing a company and, like the DCF, each technique has advantages and disadvantages in certain scenarios. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.
See our latest analysis for Hayward Holdings
The Model
We're using the 2-stage growth model, which simply means we take in account two stages of company's growth. In the initial period the company may have a higher growth rate and the second stage is usually assumed to have a stable growth rate. In the first stage we need to estimate the cash flows to the business over the next ten years. Where possible we use analyst estimates, but when these aren't available we extrapolate the previous free cash flow (FCF) from the last estimate or reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.
A DCF is all about the idea that a dollar in the future is less valuable than a dollar today, and so the sum of these future cash flows is then discounted to today's value:
10-year free cash flow (FCF) estimate
2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | 2032 | 2033 | 2034 | |
Levered FCF ($, Millions) | US$175.2m | US$176.3m | US$174.3m | US$174.2m | US$175.4m | US$177.6m | US$180.4m | US$183.8m | US$187.6m | US$191.8m |
Growth Rate Estimate Source | Analyst x5 | Analyst x3 | Est @ -1.17% | Est @ -0.07% | Est @ 0.70% | Est @ 1.24% | Est @ 1.62% | Est @ 1.88% | Est @ 2.07% | Est @ 2.20% |
Present Value ($, Millions) Discounted @ 7.8% | US$163 | US$152 | US$139 | US$129 | US$121 | US$113 | US$107 | US$101 | US$95.5 | US$90.6 |
("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$1.2b
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 2.5%. We discount the terminal cash flows to today's value at a cost of equity of 7.8%.
Terminal Value (TV)= FCF2034 × (1 + g) ÷ (r – g) = US$192m× (1 + 2.5%) ÷ (7.8%– 2.5%) = US$3.7b
Present Value of Terminal Value (PVTV)= TV / (1 + r)10= US$3.7b÷ ( 1 + 7.8%)10= US$1.8b
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$3.0b. The last step is to then divide the equity value by the number of shares outstanding. Relative to the current share price of US$14.4, 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.
The Assumptions
Now the most important inputs to a discounted cash flow are the discount rate, and of course, the actual cash flows. Part of investing is coming up with your own evaluation of a company's future performance, so try the calculation yourself and check your own 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 Hayward Holdings 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 7.8%, which is based on a levered beta of 1.284. 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 Hayward Holdings
- Earnings growth over the past year exceeded the industry.
- Debt is well covered by cash flow.
- Earnings growth over the past year is below its 5-year average.
- Interest payments on debt are not well covered.
- Expensive based on P/E ratio and estimated fair value.
- Annual earnings are forecast to grow faster than the American market.
- Annual revenue is forecast to grow slower than the American market.
Moving On:
Whilst important, the DCF calculation 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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. For Hayward Holdings, there are three essential aspects you should further examine:
- Risks: We feel that you should assess the 1 warning sign for Hayward Holdings we've flagged before making an investment in the company.
- Future Earnings: How does HAYW'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. 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.
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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.
About NYSE:HAYW
Hayward Holdings
Designs, manufactures, and markets a portfolio of pool equipment and associated automation systems in North America, Europe, and internationally.
Proven track record with limited growth.