G-III Apparel Group, Ltd.'s (NASDAQ:GIII) Intrinsic Value Is Potentially 53% Above Its Share Price

Key Insights

• G-III Apparel Group's estimated fair value is US$41.17 based on 2 Stage Free Cash Flow to Equity
• G-III Apparel Group's US$26.90 share price signals that it might be 35% undervalued
• Analyst price target for GIII is US$27.60 which is 33% below our fair value estimate

Today we'll do a simple run through of a valuation method used to estimate the attractiveness of G-III Apparel Group, Ltd. (NASDAQ:GIII) 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. Don't get put off by the jargon, the math behind it is actually quite straightforward.

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.

View our latest analysis for G-III Apparel Group

Crunching The Numbers

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. 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, so we discount the value of these future cash flows to their estimated value in today's dollars:

10-year free cash flow (FCF) estimate

	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034
Levered FCF ($, Millions)	US$26.2m	US$143.9m	US$140.5m	US$139.2m	US$139.3m	US$140.4m	US$142.1m	US$144.4m	US$147.0m	US$149.9m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ -2.35%	Est @ -0.93%	Est @ 0.06%	Est @ 0.76%	Est @ 1.24%	Est @ 1.59%	Est @ 1.82%	Est @ 1.99%
Present Value ($, Millions) Discounted @ 8.8%	US$24.1	US$122	US$109	US$99.4	US$91.5	US$84.7	US$78.9	US$73.7	US$69.0	US$64.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$817m

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 2.4%. We discount the terminal cash flows to today's value at a cost of equity of 8.8%.

Terminal Value (TV)= FCF₂₀₃₄ × (1 + g) ÷ (r – g) = US$150m× (1 + 2.4%) ÷ (8.8%– 2.4%) = US$2.4b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$2.4b÷ ( 1 + 8.8%)¹⁰= US$1.0b

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$1.9b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of US$26.9, the company appears quite undervalued at a 35% 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.

Important 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 G-III Apparel Group 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 8.8%, which is based on a levered beta of 1.390. 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 G-III Apparel Group

Next Steps:

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 instance, if the terminal value growth rate is adjusted slightly, it can dramatically alter the overall result. What is the reason for the share price sitting below the intrinsic value? For G-III Apparel Group, we've put together three relevant elements you should explore:

1. Risks: Be aware that G-III Apparel Group is showing 1 warning sign in our investment analysis , you should know about...
2. Future Earnings: How does GIII'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 NASDAQGS 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com