A Look At The Intrinsic Value Of Superior Group of Companies, Inc. (NASDAQ:SGC)

Key Insights

• Using the 2 Stage Free Cash Flow to Equity, Superior Group of Companies fair value estimate is US$10.06
• Superior Group of Companies' US$11.78 share price indicates it is trading at similar levels as its fair value estimate
• When compared to theindustry average discount of -14%, Superior Group of Companies' competitors seem to be trading at a lesser premium to fair value

Today we will run through one way of estimating the intrinsic value of Superior Group of Companies, Inc. (NASDAQ:SGC) by projecting its future cash flows and then discounting them to today's value. The Discounted Cash Flow (DCF) model is the tool we will apply to do this. Believe it or not, it's not too difficult to follow, as you'll see from our example!

We generally believe that a company's value is the present value of all of the cash it will generate in the future. However, a DCF is just one valuation metric among many, and it is not without flaws. 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 Superior Group of Companies

The Calculation

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. 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)	US$21.0m	US$24.1m	US$18.2m	US$15.1m	US$13.5m	US$12.5m	US$12.0m	US$11.7m	US$11.6m	US$11.6m
Growth Rate Estimate Source	Analyst x1	Analyst x1	Est @ -24.66%	Est @ -16.60%	Est @ -10.95%	Est @ -7.00%	Est @ -4.23%	Est @ -2.30%	Est @ -0.94%	Est @ 0.01%
Present Value ($, Millions) Discounted @ 9.6%	US$19.2	US$20.1	US$13.8	US$10.5	US$8.5	US$7.2	US$6.3	US$5.7	US$5.1	US$4.7

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = US$101m

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 2.2%. We discount the terminal cash flows to today's value at a cost of equity of 9.6%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = US$12m× (1 + 2.2%) ÷ (9.6%– 2.2%) = US$162m

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= US$162m÷ ( 1 + 9.6%)¹⁰= US$65m

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 US$166m. 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$11.8, the company appears around fair value at the time of writing. 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.

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 Superior Group of Companies 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 9.6%, which is based on a levered beta of 1.468. 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 Superior Group of Companies

Moving On:

Although the valuation of a company is important, it 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. 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 Superior Group of Companies, we've put together three relevant factors you should look at:

1. Risks: To that end, you should learn about the 3 warning signs we've spotted with Superior Group of Companies (including 1 which shouldn't be ignored) .
2. Future Earnings: How does SGC'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 NASDAQGM 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.